Hi Can anyone solve this questions 1 2 3 Name some of the be

Hi, Can anyone solve this questions?

1. 2. 3. Name some of the benefits and some of the costs to have a monetary union. How can the optimum size of a monetary union be derived (in theory)? What is the real exchange rate and why is it important for the analysis of fixed exchange rate systems?

Solution

Answer 1:

Some of the advantages of having a monetary union are as follows:

1. Transparency - The players in the market can easily compare the prices of international goods and services.

2.Lower Transaction costs - Since it leads to uniform currency in both the countries, thus abolition of financial intermediaries leads to lower transaction costs.

3. Trade Creation - Trade creation between the members of the single currency area is likely to increase because of creation of trade.

4. Devaluation of currency is not easy and thus it prevents currency wars.

Some of the disadvantages of having a monetary union are as follows:

1. Loss of economic sovereignty - Interest rates policy cannot be used to achieve independent macro economic objectives of a nation.

2. Some of the nations who are a part of the union might not be available to converge fully with the union.

3, Also having a single interest rate policy for all the nations might not be helpful as economic variables of all nations are not similar.

Thus, there are both advantages and disadvantages of having a monetary union.