Question 1

How mobile is Europe's labor force?

Accepted Answer

Differences in language and cultural discourage labor movements between European countries. Differences in regional unemployment rates are smaller and less persistent in the United States than are differences between national unemployment rates in the European Union. Even, within European countries, labor mobility appears limited, partly because of government regulations. For example, the requirement in some countries that worker establish residence before receiving unemployment benefits makes it harder for unemployed workers to seek jobs in regions that are far from their current homes.

Question 2

"The costs and benefits for a country from joining a fixed-exchange rate area such as the EMS depend on how well-integrated its economy is with those of its potential partners." Discuss.

Accepted Answer

We will expand on this idea, which is roughly the theory of an optimum currency area as developed by Mundell. A major economic benefit of fixed exchange rates is that they simplify economic calculations and provide a more predictable basis for decisions that involve international transactions than do floating rates. This gain in monetary efficiency would be even higher if the factors of production could migrate freely. The costs of joining a fixed-exchange rate area is that a country gives up the ability to use the exchange rate and monetary policy to stabilize the domestic economy. So, if a country has a well-integrated economy with those in the fixed-exchange rate area, then the benefits would likely outweigh the costs.

Question 3

Is the EU an optimum currency area? Why or why not?

Accepted Answer

Europe is not an optimum currency area. Labor mobility is highly limited. Economic and political conflicts within the euro zone have been persistent and they continue to result in questions regarding the ability of the euro zone to survive going forward.

Question 4

Explain the theory of optimum currency areas.

Accepted Answer

The theory implies that countries will w

Question 5

Why does the LL schedule have a negative slope?

Accepted Answer

A)  The economic stability loss from pegging to the area's currencies rises as the degree of economic interdependence rises. 
B)  The economic stability loss from pegging to the area's currencies falls as the degree of economic interdependence rises. 
C)  The economic stability loss from pegging to the area's currencies falls as the degree of economic interdependence falls. 
D)  The economic stability loss from pegging to the area's currencies rises as the degree of economic activity increases. 
E)  The economic stability loss from pegging to the area's currencies is constant, even as the degree of economic activity increases. 
A)  The economic stability loss from pegging to the area's currencies rises as the degree of economic interdependence rises. 
B)  The economic stability loss from pegging to the area's currencies falls as the degree of economic interdependence rises. 
C)  The economic stability loss from pegging to the area's currencies falls as the degree of economic interdependence falls. 
D)  The economic stability loss from pegging to the area's currencies rises as the degree of economic activity increases. 
E)  The economic stability loss from pegging to the area's currencies is constant, even as the degree of economic activity increases.

Question 6

Why did the EU countries move away from the EMS toward the goal of a single shared currency?

Accepted Answer

(1) To produce a greater degree of Europ

Question 7

The German central bank in the European Monetary System, 1979-1998

Accepted Answer

A)  was very inflation-averse. 
B)  was moderately inflation-averse. 
C)  was willing to accept inflation. 
D)  lacked control over inflation since it had fixed its exchange rate. 
E)  lacked sufficient reserves. 
A)  was very inflation-averse. 
B)  was moderately inflation-averse. 
C)  was willing to accept inflation. 
D)  lacked control over inflation since it had fixed its exchange rate. 
E)  lacked sufficient reserves.

Question 8

When the exchange rate is

Accepted Answer

A)  flexible, purposeful stabilization is more difficult because monetary policy has no power at all to affect domestic output and employment. 
B)  fixed, purposeful stabilization is less difficult because monetary policy has no power at all to affect domestic output and employment. 
C)  fixed, purposeful stabilization is more difficult because monetary policy has no power at all to affect domestic output and employment. 
D)  a crawling peg, rather than fixed, purposeful stabilization is more difficult because monetary policy has no power at all to affect domestic output and employment. 
E)  fixed rather than crawling peg purposeful stabilization is more difficult because fiscal policy has no power at all to affect domestic output and employment. 
A)  flexible, purposeful stabilization is more difficult because monetary policy has no power at all to affect domestic output and employment. 
B)  fixed, purposeful stabilization is less difficult because monetary policy has no power at all to affect domestic output and employment. 
C)  fixed, purposeful stabilization is more difficult because monetary policy has no power at all to affect domestic output and employment. 
D)  a crawling peg, rather than fixed, purposeful stabilization is more difficult because monetary policy has no power at all to affect domestic output and employment. 
E)  fixed rather than crawling peg purposeful stabilization is more difficult because fiscal policy has no power at all to affect domestic output and employment.

Question 9

How many countries are in the EU as of January 1, 2014?

Accepted Answer

A)  9 
B)  15 
C)  17 
D)  18 
E)  25 
A)  9 
B)  15 
C)  17 
D)  18 
E)  25

Question 10

The result of the reunification of eastern and western Germany in 1990

Accepted Answer

A)  was a boom in Germany and higher inflation, with no effect on nearby countries. 
B)  was a recession in Germany and lower inflation, with no effect on nearby countries. 
C)  was a boom in Germany and higher inflation, and, with other EMS countries' commitment to fixed exchange rates, a deep recession in nearby countries. 
D)  was a recession in Germany and lower inflation, and, with other EMS countries' commitment to fixed exchange rates, a deep recession in nearby countries. 
E)  was a recession in Germany and lower inflation, causing a boom in nearby countries. 
A)  was a boom in Germany and higher inflation, with no effect on nearby countries. 
B)  was a recession in Germany and lower inflation, with no effect on nearby countries. 
C)  was a boom in Germany and higher inflation, and, with other EMS countries' commitment to fixed exchange rates, a deep recession in nearby countries. 
D)  was a recession in Germany and lower inflation, and, with other EMS countries' commitment to fixed exchange rates, a deep recession in nearby countries. 
E)  was a recession in Germany and lower inflation, causing a boom in nearby countries.

Question 11

Explain why even owners of capital that cannot be moved can avoid more of the economic stability loss due to fixed exchange rates when Norway's economy is open to capital flows.

Accepted Answer

The main reason is through diversificati

Question 12

The credibility theory of EMS had as an effect

Accepted Answer

A)  the inflation rates of member countries converging to the low German levels, a result that was not matched by similar countries who did not fix their exchange rates. 
B)  the inflation rates of member countries failing to converge to the low German levels. 
C)  the inflation rates of member countries converging to the low German levels, but other countries including U.S. and Britain also reduced inflation in this time period without fixing exchange rates. 
D)  the inflation rate in Germany rose to match the inflation rates of other member countries. 
E)  the inflation rate in the U.S. dropped to the low German levels. 
A)  the inflation rates of member countries converging to the low German levels, a result that was not matched by similar countries who did not fix their exchange rates. 
B)  the inflation rates of member countries failing to converge to the low German levels. 
C)  the inflation rates of member countries converging to the low German levels, but other countries including U.S. and Britain also reduced inflation in this time period without fixing exchange rates. 
D)  the inflation rate in Germany rose to match the inflation rates of other member countries. 
E)  the inflation rate in the U.S. dropped to the low German levels.

Question 13

Discuss the effects of the reunification of eastern and western Germany in 1990 on both Germany and its neighboring European countries.

Accepted Answer

Germany: boom, high interest rates to fi

Question 14

Which one of the following statements is TRUE?

Accepted Answer

A)  A fixed exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the relative price of domestic and foreign goods. 
B)  A flexible exchange rate does not automatically cushions the economy's output and employment by allowing an immediate change in the relative price of domestic and foreign goods. 
C)  A flexible exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the relative price of domestic and foreign goods. 
D)  A flexible exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the absolute price of domestic and foreign goods. 
E)  A fixed exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the absolute price of domestic and foreign goods. 
A)  A fixed exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the relative price of domestic and foreign goods. 
B)  A flexible exchange rate does not automatically cushions the economy's output and employment by allowing an immediate change in the relative price of domestic and foreign goods. 
C)  A flexible exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the relative price of domestic and foreign goods. 
D)  A flexible exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the absolute price of domestic and foreign goods. 
E)  A fixed exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the absolute price of domestic and foreign goods.

Question 15

Is Europe an optimum currency area?

Accepted Answer

An open question. I think yes, the area'

Question 16

Fiscal federalism in the EU refers to

Accepted Answer

A)  one nation's control of the monetary policy of all the other nations. 
B)  freedom of member countries to leave the EU at any time. 
C)  the transfer of economic resources from members with healthy economies to those suffering economic setbacks. 
D)  one nation's freedom to abandon the Euro and use its own currency. 
E)  the transfer of economic resources between members with healthy economies. 
A)  one nation's control of the monetary policy of all the other nations. 
B)  freedom of member countries to leave the EU at any time. 
C)  the transfer of economic resources from members with healthy economies to those suffering economic setbacks. 
D)  one nation's freedom to abandon the Euro and use its own currency. 
E)  the transfer of economic resources between members with healthy economies.

Question 17

Which of the following statements is MOST accurate?

Accepted Answer

A)  A rise in the size and frequency of country-specific disturbances to the joining country's product markets raises the critical level of economic integration at which the exchange rate area is joined. 
B)  A rise in the size and frequency of country-specific disturbances to the joining country's product markets lowers the critical level of economic integration at which the exchange rate area is joined. 
C)  A decline in the size and frequency of country-specific disturbances to the joining country's product markets raises the critical level of economic integration at which the exchange rate area is joined. 
D)  A rise in the size and frequency of country-specific disturbances to the joining country's product markets has no effect on the critical level of economic integration at which the exchange rate area is joined. 
E)  A decline in the size and frequency of country-specific disturbances to the joining country's product markets does not affect the level of economic integration at which the exchange rate area is joined. 
A)  A rise in the size and frequency of country-specific disturbances to the joining country's product markets raises the critical level of economic integration at which the exchange rate area is joined. 
B)  A rise in the size and frequency of country-specific disturbances to the joining country's product markets lowers the critical level of economic integration at which the exchange rate area is joined. 
C)  A decline in the size and frequency of country-specific disturbances to the joining country's product markets raises the critical level of economic integration at which the exchange rate area is joined. 
D)  A rise in the size and frequency of country-specific disturbances to the joining country's product markets has no effect on the critical level of economic integration at which the exchange rate area is joined. 
E)  A decline in the size and frequency of country-specific disturbances to the joining country's product markets does not affect the level of economic integration at which the exchange rate area is joined.

Question 18

"Given that labor remains relatively immobile within Europe, the European Union's success in liberalizing its capital flows may have worked perversely to worsen the economic stability loss due to the process of monetary unification." Discuss.

Accepted Answer

Probably right. This is another example

Question 19

Did the 1957 Treaty of Rome turn the EU into a truly unified market?

Accepted Answer

A)  Yes, it paved the way for the current EMU. 
B)  No, although it established a customs union, it failed to remove barriers to the movement of goods and factors within Europe. 
C)  No, it was only after the German unification and locating the ECB in Frankfurt that unity was achieved. 
D)  No, since the Northern members of the EU had larger endowments of capital and skilled labor. 
E)  No, the Treaty of Rome created more trade barriers between European countries. 
A)  Yes, it paved the way for the current EMU. 
B)  No, although it established a customs union, it failed to remove barriers to the movement of goods and factors within Europe. 
C)  No, it was only after the German unification and locating the ECB in Frankfurt that unity was achieved. 
D)  No, since the Northern members of the EU had larger endowments of capital and skilled labor. 
E)  No, the Treaty of Rome created more trade barriers between European countries.

Question 20

How much trade do currency unions create?

Accepted Answer

The main result is that currency unions

Exam 21: Optimum Currency Areas and the Euro

How mobile is Europe's labor force?

"The costs and benefits for a country from joining a fixed-exchange rate area such as the EMS depend on how well-integrated its economy is with those of its potential partners." Discuss.

Is the EU an optimum currency area? Why or why not?

Explain the theory of optimum currency areas.

Why does the LL schedule have a negative slope?

Why did the EU countries move away from the EMS toward the goal of a single shared currency?

The German central bank in the European Monetary System, 1979-1998

When the exchange rate is

How many countries are in the EU as of January 1, 2014?

The result of the reunification of eastern and western Germany in 1990

Explain why even owners of capital that cannot be moved can avoid more of the economic stability loss due to fixed exchange rates when Norway's economy is open to capital flows.

The credibility theory of EMS had as an effect

Discuss the effects of the reunification of eastern and western Germany in 1990 on both Germany and its neighboring European countries.

Which one of the following statements is TRUE?

Is Europe an optimum currency area?

Fiscal federalism in the EU refers to

Which of the following statements is MOST accurate?

"Given that labor remains relatively immobile within Europe, the European Union's success in liberalizing its capital flows may have worked perversely to worsen the economic stability loss due to the process of monetary unification." Discuss.

Did the 1957 Treaty of Rome turn the EU into a truly unified market?

How much trade do currency unions create?

Introduction

World Trade: an Overview

Labor Productivity and Comparative Advantage: the Ricardian Model

Specific Factors and Income Distribution

Resources and Trade: the Heckscher-Ohlin Model

The Standard Trade Model

External Economies of Scale and the International Location of Production

Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises

The Instruments of Trade Policy

The Political Economy of Trade Policy

Trade Policy in Developing Countries

Controversies in Trade Policy

National Income Accounting and the Balance of Payments

Exchange Rates and the Foreign Exchange Market: an Asset Approach

Money, Interest Rates, and Exchange Rates

Price Levels and the Exchange Rate in the Long Run

Output and the Exchange Rate in the Short Run

Fixed Exchange Rates and Foreign Exchange Intervention

International Monetary Systems: an Historical Overview

Financial Globalization: Opportunity and Crisis

Developing Countries: Growth, Crisis, and Reform

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