A high degree of real wage flexibility will tend to reduce the cost to a country of joining a currency union because ?

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

Correct Answer: 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 ✔

Last Updated: June 18, 2019