Monetary union

Question 1

Define monetary union

Answer 1

• member countries of a common mkt
• adopt common currency and central bank responsible for monetary policy
• e.g. European Monetary Union

Question 2

+ve of single currency

Answer 2

1. Eliminates exchange rate risk and uncertainty
2. Eliminates transaction costs
3. Encourages price transparency
4. Low rates of inflation – low i/r, more investment and increased output

Question 3

+ve: Eliminates exchange rate risk and uncertainty

Answer 3

• fluctuations reduced
• encourages trade and investment across boundaries
• increase allocative efficiency

Question 4

+ve: Eliminate transaction costs

Answer 4

• conversion of currency fee
• significant savings
• encourages trade, investments and international financial flows

Question 5

+ve: Encourages price transparency

Answer 5

• ability of consumers and firms to compare px in all countries w/o having to make exchange rate calc and conversions
• easier to see px diff quickly and accurately
• promote competition and efficiency

Question 6

+ve: Low rates of inflation – low i/r, increased I and output

Answer 6

• single central bank maintain px stability
• low inflation
• low i/r, higher I and output
• benefits all countries with same currency

Question 7

-ve

Answer 7

1. Unable to use exchange rates as a mechanism of adjustment
2. Unable to use monetary policy as an econ policy
3. Monetary policies implemented by central bank have varying degrees of impact on diff countries

Question 8

-ve: Unable to use exchange rates as mechanism of adjustment (-ve)

Answer 8

• member country has trade deficit with another member country
• if experiencing higher rate of inflation where goods become less export competitive
• cannot depreciate/devalue its own national currency to correct the imbalance

Question 9

-ve: Unable to use monetary policy as an econ policy (-ve)

Answer 9

• only common central bank can implement
• objective: price stability for the region as a whole
• indiv country cannot carry out own monetary policy to influence i/r and hence lvl of economic activity within its boundaries

Question 10

-ve: Monetary policies pursued by central bank has varying effects on diff countries

Answer 10

• impacts each member country differently
• depending on circumstances
• differ in respect to degrees of inflation, unNt
• single monetary policy might not suit every country’s needs, may be inappropriate
• ie. 1 country face unNt, the other face inflation – EMP suit needs of 1st group, worsen 2nd grp