Background: One of the main advantages of adopting a strong foreign currency as sole legal tender is to reduce the transaction costs of trade among countries using the same currency.[13] There are at least two ways to infer this impact from data. The first is the significantly negative effect of exchange rate volatility on trade in most cases, and the second is an association between transaction costs and the need to operate with multiple currencies.[14] Economic integration with the rest of the world becomes easier as a result of lowered transaction costs and stabler prices.[2] Rose (2000) applied the gravity model of trade and provided empirical evidence that countries sharing a common currency engage in significantly increased trade among them, and that the benefits of currency substitution for trade may be large.[15]

Situation: Two countries are considering adopting the same currency. Country A will begin to use the currency of Country B if they agree to make this change. Currently there is a 2 to 1 exchange rate on currency from country A to country B but this changes over time. Also in order to exchange the currency you have to pay a 5% fee on whatever the amount is you would like to exchange. Under the new system there will be no exchange rate and there will no longer be a reason to pay the transaction fee as everyone will have the same currency.

Question: Which Counties currency is worth more?
Answer: B

Situation: Two countries are considering adopting the same currency. Country A will begin to use the currency of Country B if they agree to make this change. Currently there is a 2 to 1 exchange rate on currency from country A to country B but this changes over time. Also in order to exchange the currency you have to pay a 5% fee on whatever the amount is you would like to exchange. Under the new system there will be no exchange rate and there will no longer be a reason to pay the transaction fee as everyone will have the same currency.

Question: Will the transaction fee increase or decrease if the two countries adopt the same currency?
Answer: decrease

Situation: Two countries are considering adopting the same currency. Country A will begin to use the currency of Country B if they agree to make this change. Currently there is a 2 to 1 exchange rate on currency from country A to country B but this changes over time. Also in order to exchange the currency you have to pay a 5% fee on whatever the amount is you would like to exchange. Under the new system there will be no exchange rate and there will no longer be a reason to pay the transaction fee as everyone will have the same currency.

Question: Under the current system, will you have more or less money after exchanging currencies?
Answer: less

Situation: Two countries are considering adopting the same currency. Country A will begin to use the currency of Country B if they agree to make this change. Currently there is a 2 to 1 exchange rate on currency from country A to country B but this changes over time. Also in order to exchange the currency you have to pay a 5% fee on whatever the amount is you would like to exchange. Under the new system there will be no exchange rate and there will no longer be a reason to pay the transaction fee as everyone will have the same currency.

Question: Which countries currency will be used?
Answer: B