Question 1

Why do the 10-year bond interest rates vary between member countries in the EU?

Accepted Answer

The ECB controls very short-term interest rates as part of its monetary policy. However, it does not control long-term interest rates such as those paid on 10-year government bonds. For example, the bond interest rate for Greece in March 2012 was over 20% compared to around 2.5% for UK bonds and around 2% for German bonds. Bond interest rates reflect the risk of default that the financial markets place on the bonds. Clearly Greece government borrowing is much riskier for the purchaser of Greek bonds.

Question 2

Why may keeping to the fiscal pact be difficult for a country running up a large government debt?

Accepted Answer

A country within the currency union running up a large government debt will soon reach the point where it is required to foster greater budgetary discipline in order to bring it back in line within the treaty targets. This involves austerity measures, achieved by reducing government spending and increasing taxation. In going for a more balanced budget, the government may be responsible for a decline in national income. Increased taxes reduces savings and therefore investment. Unemployment rises as a result.

Question 3

Fiscal federalism can be argued to be important in a common currency area because

Accepted Answer

A)  it is likely that some member countries of the common currency area will have larger populations than others. 
B)  fiscal policy is needed to stabilize the economy of any of the member countries of the common currency area if and when a member country is affected by an asymmetric macroeconomic shock. 
C)  fiscal policy is a controversial issue. 
D)  central banks cannot be given responsibility for fiscal policy 
A)  it is likely that some member countries of the common currency area will have larger populations than others. 
B)  fiscal policy is needed to stabilize the economy of any of the member countries of the common currency area if and when a member country is affected by an asymmetric macroeconomic shock. 
C)  fiscal policy is a controversial issue. 
D)  central banks cannot be given responsibility for fiscal policy B

Question 4

In the context of the Single European Market project, the single European Currency was seen as a final step towards completing the single market.

Accepted Answer

A) True 
 B)False

Question 5

Which one of these benefits of a single currency is NOT correctly explained?

Accepted Answer

A)  Using a single currency reduces price discrimination because companies will be obliged by law to charge the same prices for their goods in the different countries of the currency union. 
B)  None of the benefits of a single currency described in these answers is incorrectly explained. 
C)  Using a single currency reduces transaction costs involved in trade between members of a common currency area and the resources that are no longer employed in working on currency transactions can be used more productively to produce other goods and services. 
D)  Using a single currency eliminates exchange rate variability for companies trading with other members of the common currency area and so companies may engage in more of this trade, and they can also eliminate the cost of entering into forward foreign exchange contracts with banks. 
A)  Using a single currency reduces price discrimination because companies will be obliged by law to charge the same prices for their goods in the different countries of the currency union. 
B)  None of the benefits of a single currency described in these answers is incorrectly explained. 
C)  Using a single currency reduces transaction costs involved in trade between members of a common currency area and the resources that are no longer employed in working on currency transactions can be used more productively to produce other goods and services. 
D)  Using a single currency eliminates exchange rate variability for companies trading with other members of the common currency area and so companies may engage in more of this trade, and they can also eliminate the cost of entering into forward foreign exchange contracts with banks.

Question 6

EMU stands for

Accepted Answer

A)  Economic and monetary union. 
B)  European monetary union. 
C)  Euro monetary union. 
D)  All of the above. 
A)  Economic and monetary union. 
B)  European monetary union. 
C)  Euro monetary union. 
D)  All of the above.

Question 7

If two countries, A and B, have separate currencies and there is a shift in consumer preferences away from the goods of country A and towards those of country B, then

Accepted Answer

A)  there will be an increase in inflation in country A. 
B)  the foreign exchange value of country A's currency is likely to rise, thus making country A's goods relatively more expensive and worsening the reduction in aggregate demand in country A. 
C)  the foreign exchange value of country A's currency is likely to fall, thus making country A's goods relatively cheaper and offsetting the reduction in aggregate demand in country A. 
D)  there will be a fall in aggregate demand in country B. 
A)  there will be an increase in inflation in country A. 
B)  the foreign exchange value of country A's currency is likely to rise, thus making country A's goods relatively more expensive and worsening the reduction in aggregate demand in country A. 
C)  the foreign exchange value of country A's currency is likely to fall, thus making country A's goods relatively cheaper and offsetting the reduction in aggregate demand in country A. 
D)  there will be a fall in aggregate demand in country B.

Question 8

To what extent is the eurozone an optimal currency area (OCA)?

Accepted Answer

An OCA is an optimal currency area where

Question 9

The fiscal compact has a key feature to control

Accepted Answer

A)  Cyclical deficit 
B)  Structural deficit 
C)  Interest rates 
D)  The amount a country can increase taxes 
A)  Cyclical deficit 
B)  Structural deficit 
C)  Interest rates 
D)  The amount a country can increase taxes

Question 10

The Stability and Growth Pact set a limit on EMU member governments' budget deficits of

Accepted Answer

A)  1% of GDP. 
B)  2% of GDP. 
C)  3% of GDP. 
D)  3% of government spending. 
A)  1% of GDP. 
B)  2% of GDP. 
C)  3% of GDP. 
D)  3% of government spending.

Question 11

Some of the criteria for deciding whether a group of economies constitute an optimum currency area are probably endogenous.

Accepted Answer

A) True 
 B)False

Question 12

How does the eurozone compare with the USA as a possible optimal currency area (OCA)?

Accepted Answer

A)  The eurozone has a higher degree of labour mobility than the USA and labour law is much less restrictive in the eurozone than in the USA. On these measures, the eurozone is more likely to be an OCA than is the USA. 
B)  The eurozone has a lower degree of labour mobility than the USA and labour law is much more restrictive in the eurozone than in the USA. On these measures, the eurozone is less likely to be an OCA than is the USA. 
C)  The eurozone has a higher degree of labour mobility than the USA but labour law is much more restrictive in the eurozone than in the USA. On these measures, it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA. 
D)  The eurozone has a lower degree of labour mobility than the USA but labour law is much less restrictive in the eurozone than in the USA. On these measures, it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA. 
A)  The eurozone has a higher degree of labour mobility than the USA and labour law is much less restrictive in the eurozone than in the USA. On these measures, the eurozone is more likely to be an OCA than is the USA. 
B)  The eurozone has a lower degree of labour mobility than the USA and labour law is much more restrictive in the eurozone than in the USA. On these measures, the eurozone is less likely to be an OCA than is the USA. 
C)  The eurozone has a higher degree of labour mobility than the USA but labour law is much more restrictive in the eurozone than in the USA. On these measures, it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA. 
D)  The eurozone has a lower degree of labour mobility than the USA but labour law is much less restrictive in the eurozone than in the USA. On these measures, it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA.

Question 13

To try to overcome the free rider problem, the members of EMU signed the

Accepted Answer

A)  stability and growth pact. 
B)  European solidarity pact. 
C)  exchange rate mechanism pact. 
D)  responsibility and growth pact. 
E)  fiscal stability pact. 
A)  stability and growth pact. 
B)  European solidarity pact. 
C)  exchange rate mechanism pact. 
D)  responsibility and growth pact. 
E)  fiscal stability pact.

Question 14

Which one of the following is not a characteristic that reduces the cost of a single currency?

Accepted Answer

A)  Synchronized economic cycles in the countries of the common currency area. 
B)  A high degree of capital mobility among the countries of the common currency area. 
C)  A low degree of labour mobility among the countries of the common currency area. 
D)  A high degree of real wage flexibility. 
A)  Synchronized economic cycles in the countries of the common currency area. 
B)  A high degree of capital mobility among the countries of the common currency area. 
C)  A low degree of labour mobility among the countries of the common currency area. 
D)  A high degree of real wage flexibility.

Question 15

A symmetric demand shock is one that

Accepted Answer

A)  will be reversed after a time. 
B)  affects both workers' wages and profits. 
C)  both the working population and the non-working population. 
D)  affects all countries in a currency union. 
A)  will be reversed after a time. 
B)  affects both workers' wages and profits. 
C)  both the working population and the non-working population. 
D)  affects all countries in a currency union.

Question 16

Which of the following is a problem for fiscal policy in a currency union?

Accepted Answer

A)  The central bank controls interest rates on long-term bonds issued by the governments of the member countries of the currency union. 
B)  Governments of the member countries of the currency union may run large budget deficits and so crowd out private investment. 
C)  Governments of the member countries of the currency union may run large budget deficits and so impose costs on other countries by pushing up interest rates on the bonds these countries' governments issue. 
D)  It is difficult to raise enough tax revenue to pay for the operation of the currency union. 
E)  Governments of the member countries of the currency union may run large budget deficits and so force taxes to be increased across all countries of the currency union. 
A)  The central bank controls interest rates on long-term bonds issued by the governments of the member countries of the currency union. 
B)  Governments of the member countries of the currency union may run large budget deficits and so crowd out private investment. 
C)  Governments of the member countries of the currency union may run large budget deficits and so impose costs on other countries by pushing up interest rates on the bonds these countries' governments issue. 
D)  It is difficult to raise enough tax revenue to pay for the operation of the currency union. 
E)  Governments of the member countries of the currency union may run large budget deficits and so force taxes to be increased across all countries of the currency union.

Question 17

Within a currency union, the financial markets will

Accepted Answer

A)  tend to expect the member governments to support one of their number that is having difficulty in order to avoid seeing that government default on its debt. 
B)  tend to expect the member governments to remove from the union one of their number that defaults on its debt. 
C)  no longer be needed to lend to governments. 
D)  be much better regulated. 
A)  tend to expect the member governments to support one of their number that is having difficulty in order to avoid seeing that government default on its debt. 
B)  tend to expect the member governments to remove from the union one of their number that defaults on its debt. 
C)  no longer be needed to lend to governments. 
D)  be much better regulated.

Question 18

Because international capital flows are so huge, currency pegs such as the Exchange Rate Mechanism are always vulnerable to speculative attacks.

Accepted Answer

A) True 
 B)False

Question 19

Now that France and Germany use a common currency, if there is a shift in demand away from French goods and towards German goods, then

Accepted Answer

A)  employment is likely to rise in Germany but will fall in France. 
B)  unemployment will rise in Germany and inflation is likely to rise in France. 
C)  there will be no macroeconomic effects. 
D)  the central bank will reduce the interest rate for the common currency. 
A)  employment is likely to rise in Germany but will fall in France. 
B)  unemployment will rise in Germany and inflation is likely to rise in France. 
C)  there will be no macroeconomic effects. 
D)  the central bank will reduce the interest rate for the common currency.

Question 20

Going back to when France and Germany had separate currencies, if there was a shift in demand away from French goods and towards German goods, then

Accepted Answer

A)  there would be an increase in the rate of inflation in France. 
B)  there would be an increase in unemployment in Germany. 
C)  the foreign exchange value of the French franc would fall, thus making French goods relatively cheaper and so leading to an increase in aggregate demand for France's output that would off-set the initial reduction in aggregate demand. 
D)  the foreign exchange value of the French franc would rise, thus making French goods relatively more expensive and so leading to an reduction in aggregate demand for France's output that would worsen the initial reduction in aggregate demand. 
A)  there would be an increase in the rate of inflation in France. 
B)  there would be an increase in unemployment in Germany. 
C)  the foreign exchange value of the French franc would fall, thus making French goods relatively cheaper and so leading to an increase in aggregate demand for France's output that would off-set the initial reduction in aggregate demand. 
D)  the foreign exchange value of the French franc would rise, thus making French goods relatively more expensive and so leading to an reduction in aggregate demand for France's output that would worsen the initial reduction in aggregate demand.

Exam 37: Common Currency Areas and European Monetary Union

Why do the 10-year bond interest rates vary between member countries in the EU?

Why may keeping to the fiscal pact be difficult for a country running up a large government debt?

Fiscal federalism can be argued to be important in a common currency area because

In the context of the Single European Market project, the single European Currency was seen as a final step towards completing the single market.

Which one of these benefits of a single currency is NOT correctly explained?

EMU stands for

If two countries, A and B, have separate currencies and there is a shift in consumer preferences away from the goods of country A and towards those of country B, then

To what extent is the eurozone an optimal currency area (OCA)?

The fiscal compact has a key feature to control

The Stability and Growth Pact set a limit on EMU member governments' budget deficits of

Some of the criteria for deciding whether a group of economies constitute an optimum currency area are probably endogenous.

How does the eurozone compare with the USA as a possible optimal currency area (OCA)?

To try to overcome the free rider problem, the members of EMU signed the

Which one of the following is not a characteristic that reduces the cost of a single currency?

A symmetric demand shock is one that

Which of the following is a problem for fiscal policy in a currency union?

Within a currency union, the financial markets will

Because international capital flows are so huge, currency pegs such as the Exchange Rate Mechanism are always vulnerable to speculative attacks.

Now that France and Germany use a common currency, if there is a shift in demand away from French goods and towards German goods, then

Going back to when France and Germany had separate currencies, if there was a shift in demand away from French goods and towards German goods, then

What Is Economics

Thinking Like an Economist

The Market Forces of Supply and Demand

Elasticity and Its Applications

Background to Demand: Consumer Choices

Background to Supply: Firms in Competitive Markets

Consumers, Producers and the Efficiency of Markets

Supply, Demand and Government Policies

The Tax System

Public Goods, Common Resources and Merit Goods

Market Failure and Externalities

Information and Behavioural Economics

Firms Production Decisions

Market Structures I: Monopoly

Market Structures Ii: Monopolistic Competition

Market Structures Iii: Oligopoly

The Economics of Factor Markets

Income Inequality and Poverty

Interdependence and the Gains From Trade

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

The Basic Tools of Finance

Issues in Financial Markets

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Keynesian Economics and the Is-Lm Analysis

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Supply-Side Policies

The Financial Crisis and Sovereign Debt

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