If two countries, A and B, are members 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, then 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 two countries?
A) A high degree of labour mobility between the two 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.
E) A cut in taxes in both countries.

Question

Quizplus · Accepted Answer

A high degree of labor mobility between the two countries would allow workers to move from country A to country B, where demand for goods has increased, helping to balance unemployment and inflation pressures in both countries.

If Two Countries, a and B, Are Members of a Currency