In: Economics
[4 pts] Consider two countries, Greece and Germany, that have joined a monetary union and suppose Greece is prone to sudden changes in the demand for their exports. What does this look like in the GG-LL graph and how does it affect their membership in the union?
GG curve present the monetary efficiency gain . This gain takes
from the ease of which independent's and business’s can make deals
as they now share a currency. They no longer face the
unpredictability of exchange rate fluctuations, calculations and
transaction expenses. This curve has a specific slope as the
efficiency rise from joining a currency union will increase as the
country’s economic integration with the area rises.
The LL curve represents the economic stability loss, which is also
connected to the degree of economic integration between the joiner
and the area. The main regions of loss for the joiner is the
capability to control it’s exchange rate and monetary policy
decisions. This is explained in the scenario where the joiner
suffers an asymmetric shock in the currency union.
So there are two countries, Greece and Germany, that have joined a
monetary union and suppose Greece is prone to sudden changes in the
demand for their exports. LL curve shifts to the shifts to left
side and Germany will face the loss and he might be left the
membership.