Countries seeking membership in the euro area need to maintain an exchange rate band equal to ±15% of the euro. For simplicity, assume the country sets its price equal to the price in the Eurozone.

a. Suppose that trade costs are equal to 12%. In this case, would the country find it difficult or relatively easy to maintain the ±15% exchange rate band? Explain.

b. Suppose that trade costs are equal to 20%. In this case, would the country find it difficult or relatively easy to maintain the exchange rate band? Explain.

c. Looking at the data on total trade costs, do you believe the band is consistent with the no-arbitrage band?

d. Based on the disaggregated data on trade costs, do you believe this band is consistent with no arbitrage? Which specific trade costs are likely to affect potential euro area members? Which ones are not?