Explain Mundell's four conditions for adopting a single currency

Question

What will be an ideal response?

Answer 1

The first condition is that the business cycle must be synchronized and national economies must enter recessions and expansions at more or less the same time, which makes similar monetary policies desirable. The second condition is a high degree of labor and capital mobility between the member countries. This allows workers and capital to leave countries or regions where work is scarce and to join the supply of labor and capital in booming regions. The third condition is that there are regional policies capable of addressing the imbalances that may develop. Depressed areas may remain depressed if people cannot move or choose not to move because the psychological or other costs are too high or resources outside the region are not available. The fourth condition is that the nations involved must be seeking a level of integration that goes beyond simple free trade.