Answer to Question #199630 in Macroeconomics for Joseph

Question

“The negative consequences of a real estate bubble can be particularly severe in a

currency union.” Discuss the statement

Answer 1

Real estate bubble leaves people with high mortgages which poses a threat to the currency union. This is because unlimited capital movement between member states may cause moving most resources to the more productive regions at the expense of the less productive regions and the more productive regions tend to attract more capital in goods and services, which might avoid the less productive regions.