Question

Identify whether each attribute in the following table is an advantage or disadvantage of sharing a currency across country boundaries.

Attribute	Advantage	Disadvantage
Price stability
Limited scope for fiscal policy
Lower transaction costs
Speculative attacks during currency transition
Protection from monetary disturbances and speculation

Which of the following are reasons the European Union is considered   currency area? Check all that apply.

Labor immobility

Limited use of fiscal policy

Low economic efficiency gains

No legal or cultural barriers to labor mobility across borders

Answer 1

1. Price stability - advantage

Price price stability is an advantage because volatile swings in the exchange rate can destroy the profitability of the exporters. Fluctuating exchange rates can low down the confidence of investors. Therefore price stability will bring greater trade and economic growth for the countries.

2. Limited scope for fiscal policy- disadvantage

with the formation of a single currency, the central bank and the government of the country are not having autonomy to set their interest rates.

The nation is is not having the ability to employ their own fiscal policy to find tune their respective National economies. The euro commitment also so for the countries to maintain a stability pact of 1996 which puts the pressure on the countries to pursue discretionary fiscal policy because budget deficit has to be kept within certain acceptable limits.

3. Low transaction cost - advantage

If there is only a single currency there will be no longer a cost involved in changing the currencies. This can be a great benefit to the farms who trade within the euro area and even for the tourists. Due to this the increase in tourism can even be seen.

4. Speculative attack during currency transition - disadvantage

Speculative attack that is selling of untrustworthy assets by previously in active speculators and the corresponding acquisition of valuable assets that is currencies can also take place when one single currency is being used.

5. Protection from monetary disturbance and speculation- advantage

If there is only a single currency e being shared by different, it will provide protection to the smaller countries against international financial crisis and monetary disturbances, which normally affect the small countries adversely.

European union has lead to labour mobility and has the potential to help reduce labour market pressures and is economic imbalances.

There is never a complete mobility of labour even within single country.

The currency area also lead to tu to workers with better skills to reduce the structural unemployment.