Exercise 7 The incentives for a country to join a monetary union depend on the possible sources of economic shocks and the mechanisms by which such shocks will be absorbed when the country participates in the monetary union. Consider the following situations:

a. A country believes it will suffer expressive and frequent shocks in money demand over the next years. With everything else being constant, would this country be more inclined to join a monetary union than any other country whose money demand would be more stable over the same period of time? Explain your answer.

b. A country has historically been reluctant regarding the issue of population geographic mobility. With all else being constant, would this country be more inclined to join a monetary union than any other country whose population had a more flexible work force in relation to geographic mobility? Explain your answer.

c. How would your answer to item

(b) change if the educational system in the country was qualitatively inferior to the educational system in the other countries in the monetary union? Explain.