Suppose that the United Kingdom pegs the pound to the euro. If all other things remain unchanged, what would you expect to happen to European GDP if all countries who use the euro decided to adopt contractionary fiscal policies?

Question

Quizplus · Accepted Answer

Contractionary fiscal policies typically involve reducing government spending and/or increasing taxes, which can lead to a decrease in aggregate demand. When countries that use the euro adopt such policies, it generally leads to a reduction in economic activity within those countries, thereby reducing the overall GDP of the eurozone. Since the UK has pegged the pound to the euro, its economy is closely tied to the eurozone economies, but the question specifically asks about the impact on European GDP, which would be expected to fall due to the contractionary policies.

Suppose That the United Kingdom Pegs the Pound to the Euro