Q. Discuss the benefits and costs of joining a fixed-exchange area.
Answer: Benefits generally gains from the stability of the area and reduced uncertainty. The competence gain from a fixed exchange rate with the euro is greater when trade among say Norway and the euro zone is extensive than when it is small. A major economic advantage of fixed exchange rates it that they simplify economic calculations and provide a more predictable basis for decisions that involve international transactions than do floating rates. The monetary effectiveness gain from pegging say the Norwegian krone to the euro will be elevated if factors of production can migrate freely between Norway and the euro area. The supplementary extensive are cross-border trade and factor movements the greater is the gain from a fixed cross-border exchange rate.
Costs- A country that joins an exchange rate area gives up its capability to use the exchange rate and monetary policy for the reason of stabilizing output and employment. While the economy is disturbed by a change in the output market a floating exchange rate has an advantage over a fixed rate. A flexible exchange rate routinely cushions the economy's output and employment by permitting an immediate change in the relative price of domestic and foreign goods. While the exchange rate is fixed purposeful stabilization is more difficult for the reason that monetary policy has no power at all to affect domestic output and employment