A high degree of real wage flexibility will tend to reduce the cost to a country of joining a currency union because ?
Correct answer: B. real wages fall rapidly in a recession and the economy moves quickly back to long run equilibrium so limiting the duration of the recession even when exchange rate adjustment is not possible
- A. All of the reasons given in these answers are correct
- B. real wages fall rapidly in a recession and the economy moves quickly back to long run equilibrium so limiting the duration of the recession even when exchange rate adjustment is not possible
- C. workers will move from a country in which aggregate demand falls to other countries of the currency union, and so unemployment remains lower than it otherwise would
- D. real wages fall and so offset the inflationary effect of switching from the old currency to the new common currency
Explanation
With flexible real wages, wages can fall during a recession, helping employment and allowing the economy to return more quickly to long-run equilibrium when exchange-rate adjustment is unavailable. Labour mobility is a separate OCA criterion and is not implied by wage flexibility.
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