Chapter 1 Essay questions

  1. Explain how wage flexibility allows countries to reduce the cost of a monetary union when an asymmetric demand shock occurs.
  2. Explain how distrust about the solvency of a country can amplify the effects of asymmetric demand shocks, and why trust has the opposite effect.
  3. The mobility of labour was also identified as a possibility to adjust to asymmetric shocks. Identify the similarities and the differences between labour mobility and wage flexibility. Are the implications for the cost of a monetary union the same?
  4. Differences in preferences of the national monetary authorities concerning inflation and unemployment can be a source of cost of a monetary union. Do you think these differences in preferences are important today in Europe? What about other parts of the world?
  5. Explain why countries with a very centralized wage bargaining system may find it easier to avoid a wage price spiral after an oil shock than countries with less centralized wage bargaining.
  6. A monetary union implies that the short-term interest rate set by the common central bank is the same for everybody. Does that mean that all interest rates are equalized in a monetary union?
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