Suppose two nations, A and B, are part of a currency union. If consumers begin favoring products from country B over those from country A, which of the following would best mitigate the impact of these changes in aggregate demand on inflation and unemployment in both countries?

Show Answers

A strong level of labor mobility between the two countriesAn increase in government expenditures in country AA decline in the exchange rate of the shared currencyLimited capital movement between the two nationsHigher tariffs on imports from country B

Explanation

A high degree of labor mobility allows workers to move freely between countries A and B, helping to balance employment and inflation effects caused by shifts in consumer demand within a currency union. This mobility eases adjustment without requiring changes in exchange rates or fiscal policies.