Question

Explain the following questions concretely.

1. Optimal currency area theory with conditions for its effective function

Answer 1

ANSWER -

Optimal currency area is the area in which the single type of currency creates the maximum economic benefit in the country or the area may be smaller than the country. It allows for the closer integration of the capital markets and facilitates the trade. Sometimes two nations share the same economic currency but they may not benefit from such a currency union. The conditions for its effective function are as follows -

1 - The factors of production should have the perfect mobility and should be able to travel from on place to other.

2 - There should be flexibility and mobility in the financial resources so that the trade can be carried out efficiently with the financial assistance.

3 - There should be a currency risk sharing system in which the countries transfer the currencies to the countries facing lower economic growth. But this system is not politically favored.

4 - The areas of the Optimal currency area should posses the same business cycle so that they share the boom and the depression periods and no one economy shares anything alone.