In the following table identify the advantages and disadvant

In the following table, identify the advantages and disadvantages of sharing a currency across country boundaries. Which of the following are the reasons NAFTA is considered currency area? Check all that apply.

Solution

Advantages of common currency:

1.Lower transaction costs.

2. Price Stability.

3. Protection from monetary disturbances and speculation.

Disadvantages:

1. Speculative attacks during currency transition.

2. Limited scope for fiscal policy.

NAFTA is considered a \"low efficiency gains\" currency area. Although, the trade and foreign direct investment between USA, Canada and Mexico increased, but overall gains to the three countries are very low because they have different economic structures. Also, there is no provision for the common monetary policy to to be equally effective in the three countries.