the monetary union, central bank and OCA Flashcards
what is the monetary union
20 european union meber countries that use the same currency - the Euro
benefits of the monetary union
lower transaction costs as there are no exchange rates
more certainty as the price of exports and the cost of imports is known and wont fluctuate with the exchange rate
drawbacks of the monetary union
loss of monetay policy. intrest rates are set by the european central bank for the whole eurozone, member countries are unable to set their own intrest rates
less control over fiscal policy, to maintain economic stabillity ther are strict rules over the level of buget defecit and national debt a country is allowed to have
what does the european central bank do
operates independently of the EU commission and is responsible for monetary policy within the eurozone
they look at data from across the eurozone in order to set an intrest rate for all member countries
the main aim is to create price stability, of inflation at 2% for all member countries
what is an optimal currency area (OCA)
a geographical area where the benefits of having a single currency outweigh the disadvantages
examples include the Eurowithing the member countries of the EU and the pound withing the member countries of the UK
what factors determine whether somewhere is an OCA
similar economic cycle
similar levels of inflation
similar taxation policies
ability for labour and capital to move between member countries
