[4 pts] Consider two countries, Greece and Germany, that have joined a monetary union and suppose...

[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?

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Expert Solution

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.

Rahul Sunny answered 1 year ago

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