Imagine France faces an adverse demand shock but Germany doe

Imagine France faces an adverse demand shock, but Germany doe snot face it. What is more likely to happen?

Fall in German output is smaller than it would have been outside the EMU

The French real exchange rate depreciates

Fall in French output is smaller than it would have been outside the EMU

French workers will move to Germany

Solution

If France faces an adverse demand shock, the workers in the French industries will be laid off and so in order to find jobs, the French workers will move to Germany. Hence the correct answer is (D) i.e French workers will move to Germany. Option (A) is incorrect as demand shock in France would have a negligible impact on German output. Option (B) is incorrect because, due to fall in inflation in France, due to low demand, the real exchange rate would actually appreciate in favor of France. Option (C) is incorrect because it is uncertain as to how much output would have reduced if it had been out of EMU