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    (Original post by dothe_DANCE)
    Hi

    I was just wondering if anyone could help me answer this question:

    Discuss the extent to which a “two speed” Euro area will affect the viability of the monetary union. (20 marks)
    I don't think I really understand the idea of two speed Euro area in general or how it could not effect the viability of the monertary union?
    two speed euro is to do with the fact that european union members have a lack of convergence in their economic activity...for example, Germany, Austria and Netherland saw an explosive boom period whereas the 'PIIGS' were racking up debts the size of their GDP

    A monetary union is the strongest form of economic integration, it involves reducing/eliminating trade barriers, allowing labour and capital mobility, sharing a currency and having a single monetary policy...as controlled by the ECB

    So what are the reasons for a monetary union?
    • Increased inter regional trade
    • cheaper interegional trade
    • increased competition - can also be a negative
    • more 'choice'
    • single currency reduces risk and cost


    but what about the againsts?
    • monetary policy is eliminated as controlled by the ECB
    • have to agree to tariffs for importing from countries outside the trade bloc
    • menu costs of switching
    • can cause monopolies as some countries may see trade booms whilst other countries experience trade loss to their counterparts


    OK so what about the two speed euro?
    • well it means that the economies of EU member are at different stages of the economic cycle
    • some experience booms whilst others experience recessions
    • this leaves the ECB in a dilemma as to what to do with the monetary policy


    Ok so now we get onto the analysis:
    • the ECB can increase interest rates to reduce inflation in the 'booming economies' but this would reduce AD in the slow economies further hindering their economic recoveries
    • the lack of convergence due to the 'two speed euro' means that ECB decisions may benefit some economies whilst being a hinderence on others...would perhaps contradict with the ECB objective of price stability
    • being part of a monetary union means member countries are respobsible for fiscal transfers - i.e. paying for the debts of other member countries through their own tax revenue - will the booming economies like this? I think not
    • Member countries now can only use fiscal policy to change economic policies (tax, spending, investment)...but the Stability and Growth Pact limits the extent to which countries can borrow and create debt (so a booming economy such as germany is limited to borrow only 3% of its GDP)


    OK so now we've analysed the 'bad' bits, what about the pros to the monetary union and the two speed euro
    • perhaps a two speed euro is good for the overall Euro economy...is it better to have a few booming economies and a few bust economies rather than have all of the economies to be in boom then all of the economies to be in a recession?
    • having a two speed euro means that the economies that are not performing can be supported by the booming economies
    • being part of the monetary union promotes tariff free trading and labour/capital mobility
    • price transparency makes it easier for firms and consumers to import goods at the 'right price'
    • trade creation and diversion means that economies can benefit from importing good that their own economies cannot produce
    • economies of scale means that economies can trade with larger markets, reducing prices increasing demand


    so to conclude, sure the two speed euro has some consequences to the monetary union of the EU, however the benefits that economies part of the european union receive perhaps outweigh the negatives

    quote a shoddy 20 marker I must say...perhaps sway it more to the impacts of the monetary union in general rather than from a two speed euro perspective
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    (Original post by viksta1000)
    two speed euro is to do with the fact that european union members have a lack of convergence in their economic activity...for example, Germany, Austria and Netherland saw an explosive boom period whereas the 'PIIGS' were racking up debts the size of their GDP

    A monetary union is the strongest form of economic integration, it involves reducing/eliminating trade barriers, allowing labour and capital mobility, sharing a currency and having a single monetary policy...as controlled by the ECB

    So what are the reasons for a monetary union?
    • Increased inter regional trade
    • cheaper interegional trade
    • increased competition - can also be a negative
    • more 'choice'
    • single currency reduces risk and cost


    but what about the againsts?
    • monetary policy is eliminated as controlled by the ECB
    • have to agree to tariffs for importing from countries outside the trade bloc
    • menu costs of switching
    • can cause monopolies as some countries may see trade booms whilst other countries experience trade loss to their counterparts


    OK so what about the two speed euro?
    • well it means that the economies of EU member are at different stages of the economic cycle
    • some experience booms whilst others experience recessions
    • this leaves the ECB in a dilemma as to what to do with the monetary policy


    Ok so now we get onto the analysis:
    • the ECB can increase interest rates to reduce inflation in the 'booming economies' but this would reduce AD in the slow economies further hindering their economic recoveries
    • the lack of convergence due to the 'two speed euro' means that ECB decisions may benefit some economies whilst being a hinderence on others...would perhaps contradict with the ECB objective of price stability
    • being part of a monetary union means member countries are respobsible for fiscal transfers - i.e. paying for the debts of other member countries through their own tax revenue - will the booming economies like this? I think not
    • Member countries now can only use fiscal policy to change economic policies (tax, spending, investment)...but the Stability and Growth Pact limits the extent to which countries can borrow and create debt (so a booming economy such as germany is limited to borrow only 3% of its GDP)


    OK so now we've analysed the 'bad' bits, what about the pros to the monetary union and the two speed euro
    • perhaps a two speed euro is good for the overall Euro economy...is it better to have a few booming economies and a few bust economies rather than have all of the economies to be in boom then all of the economies to be in a recession?
    • having a two speed euro means that the economies that are not performing can be supported by the booming economies
    • being part of the monetary union promotes tariff free trading and labour/capital mobility
    • price transparency makes it easier for firms and consumers to import goods at the 'right price'
    • trade creation and diversion means that economies can benefit from importing good that their own economies cannot produce
    • economies of scale means that economies can trade with larger markets, reducing prices increasing demand


    so to conclude, sure the two speed euro has some consequences to the monetary union of the EU, however the benefits that economies part of the european union receive perhaps outweigh the negatives

    quote a shoddy 20 marker I must say...perhaps sway it more to the impacts of the monetary union in general rather than from a two speed euro perspective
    Wow thank-you very much that was really helpful!
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    Second bailout for Greece, possible main theme for the exam ? opinions
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    (Original post by the_prodigy)
    Second bailout for Greece, possible main theme for the exam ? opinions
    I don't think the exam will have a 'theme'..but I reckon it'll be heavily centralised about the Eurozone crisis and the ECB acting too late with their shoddy monetary policy

    I see the 20 marker being comment on...yadda yadda yadda...of trade liberalisation
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    Can someone explain to me negative real interest rates
    im baffed :s
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    (Original post by ajayhp)
    Trade & intergration
    Hi, i think that too
    What evaluative points do you think you can write about this?
    Are you using tutor 2 you, ive pretty much learnt that, do you think its enough?
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    (Original post by Tariq_3458)
    Can someone explain to me negative real interest rates
    im baffed :s
    Interest rates that fall below zero. The material suggests that monetary policy has been 'too loose' fueled by negative interest rates and so on. Therefore short-term growth has come at the expense of inflation..

    I think....
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    (Original post by Tariq_3458)
    Can someone explain to me negative real interest rates
    im baffed :s
    basically inflation is higher than interest rates

    at the moment it can be said the interest rates in the UK are 'negative'

    interest is only 0.5% whereas inflation is 5%, so we're 'losing out' by saving so people would rather spend, AD increase = short term economic growth? but is it worth it with high inflation...that's what the extracts are trying to get accross...that the short term Eurozone economic growth was at the expense of inflation
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    any1 wanna check me answer for Italy heading into a double-dip
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    (Original post by viksta1000)
    I don't think the exam will have a 'theme'..but I reckon it'll be heavily centralised about the Eurozone crisis and the ECB acting too late with their shoddy monetary policy

    I see the 20 marker being comment on...yadda yadda yadda...of trade liberalisation
    what are the evaluative points for this topic though? x
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    (Original post by Hits1)
    Interest rates that fall below zero. The material suggests that monetary policy has been 'too loose' fueled by negative interest rates and so on. Therefore short-term growth has come at the expense of inflation..

    I think....
    the bold bit is spot on

    but the interest rates will never fall below zero...that basically means by taking out loans your paying back less...or saving will cost you money lol
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    (Original post by ajayhp)
    any1 wanna check me answer for Italy heading into a double-dip
    Yeh thats good! Also put in the diagrams therefore a shift to the left of AD or AS that represents the double-dip recession.

    Really important to put diagrams everywhere you can as this clearly identifies that your an economics student, also ensures that you gets marks for analysis, Level 3 etc..
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    (Original post by viksta1000)
    the bold bit is spot on

    but the interest rates will never fall below zero...that basically means by taking out loans your paying back less...or saving will cost you money lol
    haha oh dear, Just read you reply and makes much more sense in that the inflation rate is higher than the interest rate!

    Thanks for clearing that up!
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    ty, yep will do, ty for the advice
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    Can anyone please answer a couple of simple 4 markers that i'm not 100% sure about;

    ' Distinguish between monetary convergence and real convergence'
    ' Distinguish between an economic slowdown and economic recession'

    I vaguely know what each of them is but wouldn't know how to get 4 marks! Thank you
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    (Original post by ajayhp)
    ty, yep will do, ty for the advice
    Also try and add when talking about consumer confidence - that this leads to a fall in Consumption, Consumption is a component of AD - hence there will be a further shift to the left of AD (as you have mentioned) and the same for Business confidence - Investment etc etc... Component of AD etc -
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    (Original post by mqt)
    yeah, it's seems to be a trend that it's going to be based around the final extract...so stuff about trade agreements, trade liberalisation, globalisation etc etc is what we were told too...but not too specfic cause we can never be too sure...i'm going to revise some more and i'm going to have a go at that question you've put down :yes:
    feel like exchanging some views/answers afterwards?
    Basically the key points you put down for this question are
    - Liberalisaing will mean more free trade is involved which is beneficial to any economy
    - Also from this free trade the LDC's can create an CA (comparative advantage) by moving from the primary to secondary industry. This CA will mean countries can specialise in waht its best at.
    - Also exporters gain from economies of scale and there is also poductive efficiency
    - From this free trade there will be lower prices which consumers benefit from resulting in consumer surplus.

    However
    - LDCS need the type of globalaisation where the MDCS open up thier markets from the exports from the poor world.
    - they also need to protect thier infant industries so they can gain economies of scale and becomre larger and more competitive in the long run.
    - At the momment the rich countries want the LDCS to open up thier exports and FDI but the LDCS need to impse barriers as thier can be consequences from the FDI and investment from abroad.
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    (Original post by koba-girl)
    what are the evaluative points for this topic though? x
    ok well first we start off with what trade liberisation actually is

    so trade liberilsation is basically the promotion of international trade by the reduction of barriers to entry (tariffs and non-tariff barriers)
    Liberlisation can occur when economies within the same geographical area agree to eliminate tariffs on trade within the regional trade bloc

    There are many reasons why they may wish to do this:
    • tariff free trade will reduce trade costs allowing countries to import cheaper goods as well as import cheaper raw materials for firms
    • this means that firms can reduce costs by importing cheaper materials thus reducing cost push inflation
    • firms will have access to larger markets allowing them to benefit from economies of scale
    • trade liberlisation will allow more competition into the domestic economy forcing domestic suppliers to improve efficiency in order to compete on a international level
    • economies can benefit from greater innovation and investment as members share knowledge and technology
    • monopoly power will be reduced as competition increases and hence consumers benefit from greater 'choice' and lower prices
    • economies can see increases in FDI as multi-national corporations from outside the area relocate to take advantage of tariff free trading


    However, trade integration can have many consequences
    • Trade diversion means that economies formally trading from outside the free trade area will have to transfer trade from cheaper countries to less efficient economies inside the union
    • domestic economies may suffer due to being unable to compete with compeition - can lead to increased unemployment
    • some economies will benefit more than others
    • developing countries reliant on exports who are outside the area will be greatly affected
    • imports from outside the free trade area will be more expensive as the economy has to agree to a common tariff for non union members


    so to conclude, trade liberalisation can have many benefits, but can also induce costs on economies within the union as well as outside the union
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    (Original post by viksta1000)
    basically inflation is higher than interest rates

    at the moment it can be said the interest rates in the UK are 'negative'

    interest is only 0.5% whereas inflation is 5%, so we're 'losing out' by saving so people would rather spend, AD increase = short term economic growth? but is it worth it with high inflation...that's what the extracts are trying to get accross...that the short term Eurozone economic growth was at the expense of inflation
    Thanks for dat man
    Appreciated !
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    (Original post by Hits1)
    Interest rates that fall below zero. The material suggests that monetary policy has been 'too loose' fueled by negative interest rates and so on. Therefore short-term growth has come at the expense of inflation..

    I think....
    Confused.com lol
 
 
 
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