2.23 [Related to the Making the Connection on page 1008] A report from the Organization for Economic Cooperation and Development...

2.23

[Related to the Making the Connection on page 1008] A report from the Organization for Economic Cooperation and Development (OECD) notes that: “Iceland appears to have the smallest independent, floating currency in the world. Other countries the size of Iceland either do not have their own currency (Estonia, Luxembourg, Malta) or peg their currency to that of another country (Barbados, Bahamas, Belize, Brunei, Latvia, Lithuania, Maldives, Netherlands Antilles).”

a.Why might small countries decide to not allow their currencies to float?

b.The report also noted that: “Joining the euro area would significantly lower the volatility of traded good prices and lower overall inflation volatility as nearly half of Iceland’s external trade is with countries in the euro area or pegged to it.” Why would joining the euro area have these effects? Are there any reasons why Iceland might not want to join the euro area?

Source: OECD, Economic Surveys: Iceland 2011, June 2011, p. 18.

Expert Solution

Rahul Sunny answered 2 years ago

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