If two countries A and B are member of a currency union and there is a shift in consumer preferences away from the goods of country A and towards those of country B than which one of the following would help to offset the effect of the resulting changes in aggregate demand in A and B on inflation and unemployment in the tow countries ?
Correct answer: A. A high degree of labour mobility between the tow countries
- A. A high degree of labour mobility between the tow countries
- B. An increase in government spending in country (A)
- C. A depreciation in the foreign exchange value of the common currency
- D. A low degree of capital mobility between the two countries
Explanation
When demand shifts from country A to B, workers can move from A to B, reducing unemployment in A and preventing excessive wage and price pressure in B. This labour mobility substitutes for the exchange-rate adjustment unavailable inside a currency union.
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