Should a country be more inclined or less inclined to join a currency union (common currency) under the following events:

a) Increase in the size and frequency of AD shocks to the economy.

b) Increase in the size and frequency of money demand shocks to the economy.

c) Increase in the cultural similarities between the country and the country or region it is joining.

d) Decrease in capital mobility restrictions combined with an increase in immigration restrictions.

In case a, I feel as though it depends on whether or not the AD shocks are similar between the joining regions; if they are, then they would be more inclined, but if they're not, then otherwise.

In case b, I think the country would be less inclined since they would have less control over monetary policy.

In case c, I would say more inclined because it would encourage labor movement.

Finally, in case d, I would say less inclined because, although capital would flow freely, a decrease in labor flows would be worse.

What are your thoughts on these four cases?


I think you are right about case a. However, given that there is no information about the similarity of the shocks across countries, we might answer "less inclined" as monetary policy becomes more important with larger and more frequent AD shocks.

For similar reasons, I would answer less inclined for case b, as you mentioned.

Case c is definitely more inclined, as labor movement can be increased. Here again you are correct.

Case d is very ambiguous. I do not think you can answer less or more inclined. One factor makes the country more inclined, while the other makes it less so. There is no reason to say capital movements are more or less important than labor movement.


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