Practice question 30marks
- 1. *Evaluate the possible economic effects of the introduction of a single currency by a trading block 30 marks Level 1 1-11 id of points only Level 2 12-15 2 factors with 2 evaluative points or 3 factors and 1 evaluative comment Level 3 15-21 3 factors with 2 evaluative points Level 4 22-25 4 factors with 2 evaluative points Level 5 26-30 4 factors with at least 3 evaluative points Answer this question using following ppt slides / EU disc And book Unit 94 and internet On other Trading Blocs not Using a single currency
- 2. Single currency Involves a fixed exchange rate between countries A common Monetary Policy
- 3. Economic Benefits from Monetary Union Eliminated exchange rate / transaction costs – greater stability and certainty. But usually only a small proportion of GDP Cheaper trade and travel – easier to work and live in partner countries. Greater Price Transparency – leads to fiercer competition – lower prices. But most consumers buy locally – so competitiveness has more to do with regulation than price transparency. Also can’t eliminate price differences based on different cost structures. Inward Investment Greater Macroeconomic Stability (?) – however it requires countries to be on the same cycles. More trade with partner countries – need to look at how countries outside of trading blocs perform -
- 4. Problems with Monetary Union Transition costs - menu, changing accounting systems and payment systems, short term imperfect information as consumers get used to new currency – often prices rise across the economy e.g. Greece and Ireland on entry to Euro. If Businesses use the transition to raise prices over and above exchange conversion then loss of consumer welfare. Loss of policy independence – an instrument of policy adjustment. Having the ability to adjust exchange rates either devalue or use market to depreciate Structural Problems Loss of Political Sovereignty In case of EMU it ties countries in to a Fiscal Stability Pact – though often not strictly policed and now abandoned temporarily (an annual budget deficit no higher than 3% of GDP , a national debt lower than 60% of GDP or approaching that value ) http://en.wikipedia.org/wiki/Stability_and_Growth_Pact
- 5. However Introduction can be staggered to weather many of these difficulties. e.g. Eurozone – EU countries asked to join the ERM and ERM2 to give time for countries to harmonise their monetary policies and comply with the convergence criteria. However – accountability – did countries really adhere to convergence criteria…