Guess your own nation (call it "Greece") is actually credit crunch, while there is an excess need for money (call-it "Euros")
And you may suppose that the fresh new Euro is actually Typical from Account (prices are quoted for the Euros) and you will Typical out-of Replace (any goods are traded to possess Euros).
Sensible Canadian Effort
Today guess big brother brings up a special money (refer to it as "Drachmas"). It raises the new currency by paying retirement benefits via millionairematch helicopter. However the Drachmas do not displace new Euros. The latest Euro stays just like the average from membership. Costs are gooey in terms of Euros, although rate of exchange between Drachmas and you may Euros are well versatile, thus costs are perfectly flexible with respect to Drachmas. One another Euros and you may Drachmas can be used since the news out of change.
step 1. Until brand new Drachma keeps a rate of exchange of zero, the development of the latest Drachma, also the existing stock out-of Euros, advances the complete actual worth of the stock regarding mass media out of replace, and thus reduces the extra need for brand new news out-of change, thereby reduce the seriousness of the credit crunch. While about some people are willing to explore during the the very least certain Drachmas as the a method of change, you will find certain demand to hang Drachmas, therefore, the exchange rate of your Drachma will not be no.
2. In the event the at least some individuals are able to fool around with at the very least certain Drachmas since the a medium off exchange, this means that Drachmas are an enthusiastic (imperfect) solution to Euros. The development of a different a great will reduce the newest need for people existing a beneficial that's an alternative choice to the fresh new a great. Therefore, the regarding the brand new Drachma reduces the excess need for the latest Euro, thereby reduces the credit crunch.
But in order locate this time, you must see the basically economic characteristics off recessions.