Topic 6-Monetary Union

Question 1

Monetary Union

Answer 1

This is a customs union with a common currency between members. A central bank must control the single currency, monetary and exchange rate policy for all members.

Question 2

Benefits of monetary unions: (6 Benefits)

Answer 2

1. Elimination of transaction costs
2. Price transparency
3. Elimination of fluctuations between member countries
4. Increase in FDI
5. Trade creation
6. Job Creation

Question 3

Benefits of monetary unions: (explanation)

1. Elimination of transaction costs
2. Price transparency
3. Elimination of fluctuations between member countries
4. Increase in FDI
5. Trade creation
6. Job Creation

Answer 3

1. Costs involved in changing currencies when goods are imported or exported. Banks&financial institutions charge commission when exchanging currencies>eliminated when countries use a single currency
2. single currency>easier for c to compare prices> decreases chance of price discrimination (however geographical distances&asymmetric information may not eliminate this)
3. one currency>businesses have increased certainty which could encourage investment.
4. TNCS encouraged to invest in countries which are part of the monetary union as there are no transaction costs when goods are sold (eval: little evidence that this impact is significant)
5. increase trade due to benefits of sharing single currency
6. increased trade>^jobs in export sector (industries experiencing increased exports) e.g 3.5 million British Jobs directly linked to british membership of the EU market

Question 4

Costs of membership of a monetary union:

1. Transition costs
2. Loss of economic-economic-sovereighty
3. Loss of independent Monetary policy
4. Loss of exchange rate flexibility

Answer 4

1. one-off costs associated with changing menus, price lists and slot machines when currency is introduced (eval: these costs are relatively insignificant)
2. national central banks (e.g bank of England), lose their ability to use interest rate policies to achieve independent macro-economic policies e.g Greece in global recession
3. no control over their own interest rates instead they are set by ECB. Problem: some countries may suffer from high inflation rates&can’t increase interest rates. Others with high unemployment and low inflation require lower interest
4. individual members of eurozone no longer have own currencies>a country who’s g&s’s have become uncompetitive can no longer rely on depreciation to restore competitiveness