Draw the graph of the GG and LL schedules and explain the logic behind the slopes of each of the schedules

What will be an ideal response?

The correct graph has "degree of economic integration between the joining country and the exchange rate area" on the x-axis, and "gains and losses for the joining country" on the y-axis. The GG curve has a positive slope since the monetary efficiency gain a country gets by joining a fixed exchange rate area rises as its economic integration with the area increases. The LL curve has a negative slope because the economic stability loss from pegging to the area's currencies falls as the degree of economic interdependence rises. The two curves cross at a point that determines the critical level of economic integration (1 between the fixed exchange rate area and the country considering joining. In other words, it is the minimum integration level at which the country will join. (See Figure 20-5 in the text.)