Discuss the benefits and costs of joining

Discuss the benefits and costs of joining a fixed-exchange area.

Answer:

Benefits: in general, gains from the stability of the area and reduced uncertainty. The efficiency gain from a fixed exchange rate with the euro is greater when trade between, say Norway and the euro zone, is extensive than when it is small. A major economic benefit 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 efficiency gain from pegging, say the Norwegian krone to the euro, will be higher if factors of production can migrate freely between Norway and the euro area. The more extensive are cross-border trade and factor movements, the greater is the gain from a fixed cross-border exchange rate