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Assume that the UK joins a monetary union with a single European currency... Examine the likely economic effects of this on : The UK s pattern of trade.
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Daniel Evans Assume that the UK joins a monetary union with a single European currency... Examine the likely economic effects of this on : (a) The UK s pattern of trade. At the moment, different currencies act as barriers to trade to member countries. Joining the single currency would get rid of uncertainty associated with fluctuating exchange rates and eliminate transaction costs. For example, firms would not have to incur the costs of changing money, therefore increasing income, output and employment. Britain's economic cycle tends to be 'out of sync' with the rest of Europe. UK interest rates stand at the moment at around 4.5%, but in 'Euroland' the figure is closer to 2.5%. Therefore if the UK were to join, it would have to drastically cut its interest rates. This of course would result in an inflationary boom as people will borrow and spend more, increasing the price level by shifting the AD...
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