Instruction to students: All questions are compulsory

Translation dictionaries are permitted.

TASK: EC3026 Economics of European Integration Assignment

Question 1.

Determine whether the following statements are TRUE or FALSE. Always provide a justification to your answer. NO MARKS WILL BE AWARDED IF NO JUSTIFICATION IS PROVIDED.

a)An improvement in the production technology in the foreign country generates a shift in the import supply (MS) curve in the home country. (7 marks)

b)The trade openness ratio of the Euro area as a whole is similar to the trade openness ratio of individual Euro area countries. (6 marks)

c)According to the optimal currency area theory, a monetary union among two countries is more desirable if the two countries face symmetric shocks. (6 marks)

d)The Competition (COMP) curve is upward sloping in the space. (Number of firms, Mark-up) (6 marks)

Question 2.

Consider two countries, Home and Foreign. The labor market in Home is perfectly competitive, while the labor market in Foreign is characterized by the existence of a minimum wage and unemployment. Assume that labor is homogeneous across countries.

a)Assume that in the initial situation the equilibrium wage in Home is higher than the minimum wage in Foreign

i)Graphically represent the labor market equilibrium when individuals are not allowed to migrate across countries (“no-migration” equilibrium). (5 marks)

ii)Assume now that individuals become free to move across countries and that there is perfect mobility of labor, i.e. there are no migration costs:

(iia) Graphically represent the new equilibrium. (6 marks)

(iib) Determine who gains and who loses (both in Home and Foreign) in the new equilibrium compared to the no-migration equilibrium. (7 marks)

b)Assume now instead that in the initial situation the minimum wage in Foreign is higher than the equilibrium wage in Home, and that there is perfect labor mobility. Will individuals choose to migrate from Home to Foreign? If this was the case, what would be the impact of such migration on the world employment level? (7 marks)

Question 3: EC3026 Economics of European Integration Assignment-City, University of London

Briefly explain:

a)Who decides upon (i) monetary policy, (ii) fiscal policy, and (iii) exchange rate policy, under the European Monetary Union. (8 marks)

b)Intergovernmental vs. supranational decision making. (8 marks)

c)Why the fiscal policy of one country belonging to a monetary union may have an impact on the growth of other countries belonging to the same monetary union. Refer to a model studied in the course. (9 marks)

Question 4.

Consider the Import Supply-Import Demand (MS-MD) and the Break-even/Competition (BE-COMP) models. Why are there gains from economic integration according to those models? (25 marks)