4. A politician in Portugal promises prosperity! Specifically, she claims to be

Question

4. A politician in Portugal promises prosperity! Specifically, she claims to be able to provide a stable exchange rate, allow free movement of capital and maintain independent monetary policy. Can she? Explain The government of Canada, in an effort to promote greater trade and stability, proposes that Canada and Mexico merge currencies with the United States. They are even willing to join the dollar! 5. a. What are the costs and benefits of joining a currency union? How might you evaluate the proposal? Give specific examples of recent events to make a clear argument for or against the proposal. b.

Explanation / Answer

4. No she cant. This is a clear violation of Monetray policy trilemma. You can not adjust flexible ER, Independent monetary policy and Capital mobility. It is best represented by the three edges of a triangle where you can at best maintain two.

5. Joining a similar currency regime is beneficial because your ER is stable. If the currency is Dollar, it is widely acceptable in all other countries. Flaw would be you will have to forego your own monetary policy hence tackling inflation can be difficult.

Recent example can be of GREECE crisis, Brexit, EU (EURO Countries), Puerto Rico (US). Some counties in this have a common currency hence when one of them collapse, the shocks travel really fast and affect other others. Hence, it is suggested that one should not join the currency union unless the macroeconomic stability is similar for both the nations. Eg. In the 2008 crisis India was least affected beacuse they did not share a common currency as compared to EU.

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