1. Why might a group of countries wish to have a common currency? Explain four reasons...

1. Why might a group of countries wish to have a common currency? Explain four reasons

2. How are interest rates and inflation rates related? Explain at least 1 page

Expert Solution

Ans. 1. The reasons why countries wish to have a single currency are

A. Eliminate exchange rate fluctuation : when the countries have same currency, they do not have to go through the phase of currency exchange and they don't have to care about the exchange rate as well which saves their money because the exchange rate for every country is different.

B. Price transparency : When there is single currency, all prices are quoted in same currency and hence no firm can charge higher to the local national currencies , thus there is transparency as nothing is hidden .

C. Stability : When there is only one currency , there will be more stability in the entire world as nobody has to run in order to exchange the currencies of different countries and it is very easy to work out with the same currency .

D. Reduced transaction cost : Due to single currency, the tourism is promoted as they do not have to exchange and also due to this fact, the transaction cost is reduced in this way.

2. Inflation is defined as the increased rate or price of goods and interest rate is defined as the amount charged by the lender to the borrower .

High inflation effect on interest rate : When the inflation is high , the interest rate will also be increased and due to that the borrowing becomes expensive and people do not borrow much , hence in this manner the money supply will be limited and also the high inflation will be controlled .

Low inflation effect on interest rate : When th einflation is low, the interest rates are decreased so that more people borrow and there is increased money supply in the market.

Hence this is the relationship between interest rate and inflation.

Rahul Sunny answered 2 years ago

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