European Economic and Monetary Union

Question 1

Exchange rate

Answer 1

Because there is a common currency, it will be more stable and decrease risk and uncertainty = Encourage trade

Question 2

Optimal currency area

Answer 2

Do benefits of a common currency outweighs the costs ?

• Benefits - No exchange rate uncertainty + Less transaction costs
• Costs - No national independence + No more ability to absorb asymmetric shocks

Question 3

ECB

Answer 3

1 central bank, therefore 1 central policy (art. 27 TFEU)

Inflation around 2%

One exchange rate

Accountable to the EP

Question 4

Basically

Answer 4

Optimum currency area:

• Lots of transactions
• Business cycles are alike
• Labor is flexible
• Fiscal solidarity

Introduce single currency because benefits outweigh costs

The EU is not an OCA!