Page 1
1.
The common currency area in Europe is called the:
A)
common market.
B)
Eurozone.
C)
euromark.
D)
European Union.
2.
The Eurozone is an example of a:
A)
common market.
B)
currency area.
C)
free-trade area.
D)
customs union.
3.
A currency union is:
A)
a trade agreement between countries.
B)
a customs union between countries.
C)
when countries abandon their domestic currency and adopt a common currency.
D)
a free trade area.
4.
In 1999, the Eurozone was:
A)
formed by all European countries to reduce tariffs.
B)
formed by 11 countries to adopt a new currency.
C)
formed by 21 countries to allow labor migration between countries.
D)
renamed the World Trade Organization.
5.
The idea of a currency union was initially proposed by:
A)
John Maynard Keynes.
B)
Paul Samuelson.
C)
Robert Mundell.
D)
Alan Greenspan.
6.
Which of the following is the same as a currency union?
A)
a monetary union
B)
a currency pact
C)
a monetary pact
D)
a monetary area
Page 2
7.
Originally considered by economist Robert Mundell, decades later, in 2001, Europe
adopted a new common currency now known as:
A)
the euroyen, ¥.
B)
the eurodollar, $.
C)
the europa, .
D)
the euro, €.
8.
In terms of importance, what place does the advent of the euro hold in economic
history?
A)
It is an important innovation in the evolution of fixed exchange rates.
B)
It is an interesting experiment from which we can learn lessons.
C)
It is a bold experiment, affecting hundreds of millions of people in one of the most
prosperous economic regions.
D)
In the grand scheme of things, the euro is less important than the fixed exchange
rate scheme devised in Bretton Woods, New Hampshire.
9.
The Maastricht Treaty, signed in 1992, initiated:
A)
European political integration.
B)
an economic and monetary union that featured a common currency.
C)
an alliance of nations who opposed environmental harms from trade.
D)
an agreement for free flow of labor and other resources across borders.
10.
The European Monetary Union was formed in 1992 to explore issues regarding currency
union under the ________ treaty.
A)
Versailles
B)
Paris
C)
Berlin
D)
Maastricht
11.
Which of the following countries is a member of the Eurozone?
A)
Sweden
B)
Finland
C)
Norway
D)
Switzerland
12.
Which of the following countries is NOT a member of the Eurozone?
A)
Germany
B)
Ireland
C)
Spain
D)
Poland
Page 3
13.
The nations of the European Union currently number _____, since _____ joined in
2013.
A)
50; France and Germany
B)
28; Croatia
C)
150; Turkey and Greece
D)
13; Mexico and Canada
14.
The country that did NOT opt out of the currency union is:
A)
United Kingdom.
B)
Sweden.
C)
Denmark.
D)
Italy.
15.
As of 2016, the European Union was composed of ______ countries.
A)
12
B)
15
C)
28
D)
22
16.
Qualifying for admission to the Eurozone requires a nation to:
A)
petition for membership with the European parliament.
B)
demonstrate a commitment to democratic principles and take an antiterrorist
stance.
C)
peg its exchange rates to the euro and demonstrate fiscal responsibility for a length
of time.
D)
join the IMF and the UN, and be recommended by other members.
17.
The decision by a nation to join a currency union is based on:
A)
the size of the nation's GDP.
B)
the diversification of its industry and population.
C)
the cost of designing, printing, and managing a national currency.
D)
the costs of abandoning a national currency versus the benefits of a common
currency.
Page 4
18.
If nations are members of a currency union that has certain characteristics to deliver the
highest net benefit, the union is known as:
A)
a floating exchange system.
B)
an optimum currency area.
C)
the exchange-rate mechanism.
D)
an optimum peg.
19.
Which of the following is the LEAST common?
A)
free trade areas
B)
currency unions
C)
currency crises
D)
nominal anchors
20.
An optimum currency union refers to the decision by a country to:
A)
join a monetary union that best serves its self-interest.
B)
join a free trade area.
C)
dollarize its economy.
D)
eliminate tariffs.
21.
Adopting a common currency implies all of the following, EXCEPT that:
A)
each region will lose its monetary autonomy.
B)
a common interest rate will be set.
C)
each region will retain its monetary authority.
D)
a common monetary policy will be set by the central bank.
22.
Larger economic benefits from a currency union occur when:
A)
there is intense competition between the economies.
B)
market integration is large, yielding efficiency benefits.
C)
the central bank acts independently.
D)
the currency is pegged to the U.S. dollar.
23.
Economic benefits to nations in a currency union will be larger whenever:
A)
the volume of transactions between the nations is larger and there is a greater
degree of economic integration.
B)
the volume of transactions is smaller but there is a greater degree of economic
integration.
C)
trade and financial flows between the nations are erratic.
D)
financial integration is lower but cultural integration is higher.
Page 5
24.
Criteria used to predict the benefits of fixed exchange rates can be applied to benefits
from an optimum currency union. Generally, benefits are higher whenever the:
A)
home country has balanced trade with its union partners.
B)
home country's economy is dissimilar to that of its union partners.
C)
home country's economy is similar to that of its union partners and it suffers
similar types of economic "shocks.”
D)
home country has large and growing trade imbalances with its union partners.
25.
Higher costs result from a currency union when:
A)
nations are economically dissimilar so that demand shocks affect each economy
asymmetrically.
B)
nations are economically similar so that demand shocks affect each economy
symmetrically.
C)
there is intense competition between the economies.
D)
the currency is pegged to the U.S. dollar.
26.
The net benefits of entering into an OCA are calculated by:
A)
measuring the symmetry between the political structures of the nations.
B)
measuring the variability of exchange rates between the nations.
C)
comparing the efficiency benefits of market integration versus the costs of
abandoning discretionary monetary policy.
D)
comparing the trade balances between the nations with growth in GDP for each
nation.
27.
As market integration and symmetry between the nations' economies rise, the:
A)
net benefits of a currency union fall.
B)
OCA becomes less desirable for each nation.
C)
political costs of a currency union rise.
D)
net benefits of a currency union rise.
Page 6
28.
(Figure: Shocks and Integration) The graph shows hypothetical OCA economic criteria
for several South American countries. Using the graph, which of the following best
satisfy the OCA criteria for forming a monetary union?
A)
Peru and Colombia
B)
Peru and Uruguay
C)
Venezuela and Uruguay
D)
Colombia and Venezuela
29.
(Figure: Shocks and Integration) Using the graph, which of the following has the highest
degree of market integration with the other countries?
A)
Peru and Colombia
B)
Peru and Uruguay
C)
Venezuela and Uruguay
D)
Venezuela
Page 7
30.
(Figure: Shocks and Integration) Suppose that policymakers in Colombia, Peru, and
Uruguay care only about being able to use policy in response to shocks? Using the
graph, which of the following is most likely to join a currency area with the other
countries?
A)
Colombia
B)
Peru
C)
Uruguay
D)
Peru and Colombia
31.
Which of the following countries is part of the ERM but NOT part of the Eurozone?
A)
France
B)
Italy
C)
Spain
D)
Denmark
32.
The decision to form a currency union is similar to the decision to peg; however, the
currency union requires:
A)
a lower level of commitment and therefore requires a lower net benefit.
B)
a higher level of commitment and therefore requires a higher net benefit.
C)
more political integration and an agreement to limit trade.
D)
the loss of political autonomy and is therefore riskier.
33.
Which would be easier to reverse? For Denmark, which now pegs its national currency
to the euro, to choose monetary autonomy and abandon its peg, or for Italy to switch
back from the euro to the lira?
A)
Italy, because all it has to do is cash euros for lire
B)
Italy, because it can change over to an electronic payments system
C)
Denmark, because it would only have to return all the euros in its treasury
D)
Denmark, because it would not have to change its currency, accounting structure,
nor reprint domestic currency
Page 8
34.
Exiting from a peg is relatively ____ compared with exiting from a common currency,
which would be ____.
A)
difficult; impossible
B)
easy; more difficult and costly
C)
complex; simple
D)
rare; much more common
35.
Which of the following cases is an OCA that is NOT preferred by a home country?
A)
The home country faces symmetric shocks with the other country.
B)
The labor market is well integrated, allowing for migration.
C)
The home country faces asymmetric shocks with the other country.
D)
The home economy is well integrated with the other country, carrying out vast
amounts of trade.
36.
Although Denmark currently pegs its krona to the euro successfully, it has not joined the
currency union. All of the following are reasons, EXCEPT:
A)
with a peg, the Danish monetary authority has the option to exercise control over
the exchange rate in the future if needed.
B)
Denmark has an additional option to abandon its peg to the euro if required to
maintain stability.
C)
Denmark has the option to conduct monetary policy if it chooses.
D)
if Denmark gave up its krona and adopted the euro, it could always easily go back
to the krona if needed to preserve monetary autonomy.
37.
Denmark is not a member of the Eurozone but is a member of the ERM. What are the
advantages to Denmark of NOT being a member of the Eurozone?
A)
There are none. Denmark stubbornly wants to have its own currency (the krone).
B)
The Danish central bank loses its monetary autonomy by not joining the Eurozone.
C)
There are not very many transactions between Denmark and Eurozone countries, so
transaction gains from membership in the Eurozone would be small for Denmark.
D)
The ERM allows much more exchange rate flexibility (+/– 15%) than the
Eurozone.
Page 9
38.
A nation whose labor market is highly integrated with other nations in a currency union
is more ______ to join because ______.
A)
unlikely; workers would suffer real wage declines if they have competition from
foreign workers
B)
unlikely; firms would find it expensive to hire workers if they have to pay in the
common currency
C)
likely; labor market integration means that when there are asymmetric demand
shocks the adjustment can be eased by migration of workers
D)
likely; labor force rules and policies can be harmonized more easily
39.
The economic costs of forming a currency union will be lower whenever:
A)
labor market integration is lower.
B)
labor market integration is higher.
C)
labor markets are not integrated.
D)
wage rigidities are present.
40.
Do the costs of forming a currency union fall or rise as the degree of labor market
integration rises among member countries?
A)
They will rise because any macroeconomic shock in one country will be
transmitted to other members when there is greater labor market integration.
B)
They will fall because labor market integration allows labor to move to other
member countries when there are negative macroeconomic shocks at home.
C)
They will rise because labor market integration allows labor to move to other
member countries when there are negative macroeconomic shocks at home.
D)
The costs of forming a currency union do not depend at all upon the degree of labor
market integration among member countries.
41.
In the United States, for a $1 fall in state government revenue, the federal government
increases transfers by:
A)
$2.
B)
$1.
C)
30 cents.
D)
15 cents.
42.
If a currency union provides more to its members than a common currency unit, such as
fiscal transfers or fiscal federalism, it would make joining that union:
A)
less costly.
B)
more beneficial.
C)
yield higher net benefits.
D)
less costly, more beneficial, and yield higher net benefits.
Page 10
43.
When nations enter into currency unions, their fiscal affairs continue to be separate. The
exception to this situation is whenever a confederation of states has a system:
A)
whereby monetary policy is decided by consensus rather than centrally.
B)
of government subsidies for firms exporting outside the union.
C)
of fiscal mechanisms that permits interstate transfers.
D)
of common tax policies and regulatory rule.
44.
A nation joining a currency union must subject itself to the ______ policies of the union,
which may or may not conform to its own objectives or economic or political values.
A)
fiscal
B)
economic
C)
monetary
D)
accounting
45.
Some nations benefit absolutely from abandoning their monetary policy and control of
their currency because:
A)
their monetary policy permitted high inflation under pressure from political
interests that would not be present under a common currency arrangement.
B)
they did not have sufficient currency in their own nation to support a higher GDP.
C)
they had a strong currency, which hurt their exports.
D)
the central bank would keep the money supply under tight control, which is not
good for economic expansion and jobs.
46.
Having one central bank responsible for managing the common currency and replacing
the national monetary authority provides benefits that include all of the following,
EXCEPT:
A)
independence and the ability to resist political pressure.
B)
better performance in keeping inflation stable with no large swings in
unemployment.
C)
the ability to tailor the supply of money for a variety of economic conditions in the
member states.
D)
provision of a stable nominal anchor.
47.
In the case of a currency union, what is a nominal anchor?
A)
It is the weight of the efficiency loss from changing to a common currency.
B)
It is an independent value, such as the value of the common currency unit,
constraining the ability of a nation to inflate its currency and prices.
C)
It is a nominal measure of GDP that is not the same as the measure for real GDP.
D)
It links that nation to other members of the currency union and permits no trade or
financial relationships outside the union.
Page 11
48.
What is meant by the term inflation bias?
A)
when policymakers allow exchange rates to continually depreciate and are willing
to accept higher rates of inflation
B)
when policymakers accept higher rates of inflation and are willing to allow
exchange rates to continually depreciate
C)
when policy makers use expansionary monetary policy for short-term gain, at the
expense of higher inflation in the longer run
D)
when fiscal policymakers use deficit financing to stimulate the economy at the
expense of higher long-run inflation
49.
The advantages of a currency union may extend to political relationships, too. How?
A)
Currency unions, unfortunately, create political dissension.
B)
Currency unions can be used by the larger nations to grab political power.
C)
Currency unions reduce each nation's individual political power.
D)
Currency unions enhance each nation's identification with other nations in the
currency union.
50.
If economic costs outweigh benefits from joining a currency union, a nation may still
choose to join because of:
A)
political pressure from the large nations.
B)
large political benefits.
C)
the fear of floating.
D)
the ability to limit imports.
51.
The theory of an OCA sets out benefits to be derived from increased trade. A
comparison of the U.S. currency area with that of the Eurozone reveals that:
A)
interstate and inter-region trade is roughly equal in both areas.
B)
interstate and inter-region trade in the United States is smaller as a percent of gross
state product than the same figure for Europe.
C)
interstate and inter-region trade in the United States is much larger as a percent of
gross state product than the same figure for Europe.
D)
trade comparisons are largely irrelevant to the success of a currency union.
Page 12
52.
A key point in the difference between the United States and the European Union as
OCAs, is that:
A)
the intra-European Union trade is significantly higher than the intrastate trade in
the United States.
B)
the intra-European Union trade is significantly lower than the intrastate trade in the
United States.
C)
the intra-European Union labor migration is much higher than the intrastate
migration in the United States.
D)
in the United States, language creates a significant barrier.
53.
A currency union would be beneficial to nations with symmetrical demand shocks so
that a coordinated monetary policy is possible. Comparing the Eurozone with the United
States, the finding is:
A)
the Eurozone nations and the U.S. states are markedly different in the correlation
between growth rates of GDP.
B)
the Eurozone nations and the U.S. states are quite similar in terms of correlation
between growth rates of GDP.
C)
the Eurozone nations have higher growth rates of GDP in their member states,
whereas the United States exhibits lower growth rates.
D)
the Eurozone is much more diverse in terms of its growth in GDP.
54.
Because of differences in culture and language, it is not surprising that:
A)
Eurozone nations are opposed in theory to the currency union but accept it in
practice.
B)
Eurozone nations tend to be more homogeneous than states in the United States.
C)
demand shocks tend to be symmetric, whereas supply shocks are asymmetric.
D)
the year-to-year flow of people between states in the United States is larger than
the same flow between member nations in the Eurozone.
55.
In the Eurozone, labor market integration (including labor mobility) between member
nations is:
A)
far ahead of the United States.
B)
on par with the United States.
C)
less than in the United States.
D)
structured differently because in the Eurozone workers have better benefits.
Page 13
56.
A key benefit for nations in a politically integrated currency union such as the United
States is the existence of fiscal federalism. What is the status of fiscal federalism in the
Eurozone?
A)
It is almost nonexistent because few fiscal transfers take place.
B)
It is thriving and encompasses many aspects of the economy.
C)
Most believe it currently lags the United States, but the situation is very fluid and
will change soon.
D)
Fiscal federalism is a concept that has relevance only in the United States because
each Eurozone nation is completely independent.
57.
The European Union labor markets are different from that of the United States in that:
A)
language adds a barrier to free movement of labor in the European Union.
B)
there is less labor regulation in the European Union.
C)
persistent unemployment exists in member countries in the European Union.
D)
language adds a barrier to free movement of labor in the European Union and
persistent unemployment exists in member countries in the European Union.
58.
The OCA of the European Union falls short of the United States, for each of the
following reasons, EXCEPT:
A)
labor market integration in the European Union is weaker.
B)
goods market integration in the European Union is weaker.
C)
fiscal transfers are negligible.
D)
the European Union has more asymmetric shocks.
59.
A variety of indicators such as goods and labor market integration, differing
unemployment rates, and the lack of fiscal federalism have prompted most economists
to:
A)
herald the success of the Eurozone.
B)
conclude that the Eurozone has performed better than the United States in nearly
every category.
C)
conclude that the Eurozone has not been (and is not now) an optimal currency area
going back to the 1990s.
D)
recommend changes to the new currency to make it more responsive to demand
shocks.
Page 14
60.
In comparing the European Union and the United States as OCAs, the authors of the text
conclude that there is(are):
A)
greater integration of goods markets and greater labor mobility in the United States
than in Europe, but about the same symmetry of shocks in the two regions.
B)
greater integration of goods markets, greater labor mobility, and greater symmetry
of shocks in the United States than in Europe.
C)
less integration of goods markets, but greater labor mobility and greater symmetry
of shocks in the United States than in Europe.
D)
greater integration of goods markets, greater labor mobility, and greater symmetry
of shocks in Europe than in the United States.
61.
In spite of less-than-optimal currency area criteria at present in the Eurozone, some
believe that the existence of a working currency union will result in:
A)
an improvement in the criteria, as the union members are committed to work for
more integration.
B)
a gradual deterioration of the union, as members seek benefits from having an
autonomous monetary policy.
C)
tension and a power struggle over which will be the dominant economy in the
union.
D)
more delay in implementing needed reforms.
62.
If a currency union lowers the cost of trade and therefore promotes increased trade, the
Euro-optimists believe that:
A)
a currency union at some point will no longer be necessary.
B)
at some point the OCA criteria will be satisfied.
C)
the benefits of having an independent monetary policy will outweigh the benefits
from the currency union.
D)
the currency union may never be beneficial to an individual nation, but it does
reduce political tension in large regions.
63.
Another benefit from entering a currency union that is not optimal would include:
A)
the idea that economies interconnected in a currency union with increased trade
also develop a symmetry of demand shocks.
B)
the reduction of interdependence and an increase in self-sufficiency.
C)
the cessation of disagreement over trade protection.
D)
the possibility of increasing the currency area.
Page 15
64.
The idea that nations in a currency union will have fewer trade barriers or other frictions
may have the dual effect of:
A)
increased integration and more risk of debt default.
B)
increased political harmony and less risk of asymmetric shocks.
C)
economies of scale and specialization as well as higher risk of asymmetric shocks.
D)
economic growth and an increase in environmental degradation.
65.
Economist Richard Baldwin says the optimism about the Eurozone may be unjustified.
His research suggests trade increases in the Eurozone as a result of the currency union:
A)
are much larger than previous estimates or forecasts and likely to show future
gains.
B)
are much smaller than previous estimates or forecasts and unlikely to show future
gains.
C)
are less stable and subject to wide variations.
D)
could be much larger if poor and unstable economies were not in the Eurozone.
66.
Some studies find that trade in the Eurozone has risen substantially, but compared with
the control group of nations that stayed out, Baldwin finds the effect is:
A)
larger (25%) because prices have fallen and trade has increased by much more than
the control group.
B)
just about the same because the control group is very similar to nations in the
Eurozone.
C)
somewhat larger (9%) because there has been no measurable price decline within
the union or evidence of trade diversion.
D)
much smaller (–2%) because trade within the union has been lackluster, whereas
trade with the control group has increased dramatically.
67.
The best estimate of the effect of the euro on trade, according to Richard Baldwin, is
a(n):
A)
increase of 9%.
B)
increase of 235%.
C)
fall of 9%.
D)
fall of 7%.
68.
According to Richard Baldwin, studies indicating massive increases in trade resulting
from currency unions are:
A)
biased because of use of data from rich countries.
B)
generally applicable to the euro.
C)
underestimating the impact of the euro on intra-European Union trade.
D)
not the result of lowering the transaction costs for trade within the euro area.
Page 16
69.
Although Europe is not an OCA, some areas in the European Union would probably
meet the criteria. Which of the following would meet them?
A)
France, Sweden, and Denmark
B)
the former Eastern bloc nations of Yugoslavia, Romania, and Bulgaria
C)
the Netherlands, Denmark, and Britain
D)
Italy, Germany, Austria, Belgium, the Netherlands, and Luxembourg
70.
The impetus to form an administrative body in Europe after World War II to distribute
Marshall Plan aid and coordinate trade and other common issues resulted in three
organizations:
A)
the WTO, the GATT, and the IMF.
B)
the European Payments Union, the UN, and the early roots of the European Union.
C)
the European Payments Union, the European Coal and Steel Community, and
Euratom.
D)
the Eastern bloc, the Warsaw Pact, and NATO.
71.
The earliest beginning of the European Union was the:
A)
Maastricht Treaty.
B)
Treaty of Rome.
C)
Paris Accord.
D)
Louvre Accord.
72.
The original six nations that formed the European Economic Community (EEC) were:
A)
Spain, Portugal, Italy, Austria, Germany, and the United Kingdom.
B)
France, Bulgaria, Romania, Luxembourg, East Germany, and Russia.
C)
Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany.
D)
Hungary, Austria, Germany, Poland, Belgium, and the United Kingdom.
73.
The new European Economic Community, after it changed its name to the European
Communities, tackled two issues related to:
A)
enlargement (expansion) of the European Communities and economic integration
between members.
B)
immigration and terrorism.
C)
secret Nazi cells and latent communism.
D)
unemployment and inflation.
Page 17
74.
After the formation of the European Community (EC), three new nations were admitted
in 1973 based on their conformance and compatibility with existing democratic norms,
economic stability, and economic development. The nations were:
A)
Portugal, Spain, and Finland.
B)
Belgium, the Netherlands, and Luxembourg.
C)
Denmark, Ireland, and the United Kingdom.
D)
Italy, Greece, and Turkey.
75.
The collapse of the Bretton Woods system of fixed exchange rates during the 1970s
prompted the EC to establish its own system. It was called the:
A)
Marshall Plan.
B)
European Currency Union (ECU).
C)
European Monetary System (EMS).
D)
lend-lease plan.
76.
The basics of the ERM in the EC provided for:
A)
flexible exchange rates and free capital flows.
B)
fixed exchange rates based on the U.S. dollar.
C)
gradual conversion to a common currency (the euro).
D)
fixed exchange rates based on a weighted basket of currencies formula.
77.
The Single European Act passed in 1987 sought to:
A)
bring former communist nations into the EC.
B)
further integrate the European economies to promote trade and economic growth.
C)
establish the European nations as sovereign nations with no political ties to the
center.
D)
impose stiff penalties for violating the exchange rate parities set in the ERM.
78.
The European Monetary System (EMS) relied on the ______ to maintain fixed rates of
exchange, but in 1992, several notable defections from the system created doubt that a
monetary union could occur.
A)
euro
B)
U.S. dollar
C)
the European currency unit (ECU)
D)
ERM
Page 18
79.
In 1979, under the ERM, the member countries were pegged to the ECU, with a ______
band of fluctuation allowed.
A)
2.5%
B)
2.25%
C)
1%
D)
10%
80.
The Maastricht Treaty of 1991 provided for all of the following, EXCEPT:
A)
an enlargement process to include more European nations.
B)
a ban on nations opting out of a currency union.
C)
a rename of the EC to the European Union.
D)
a notion of EU “citizenship.”
81.
Two nations that did not fully recover from the 1992 crisis and are not members of the
Eurozone as of 2016 are:
A)
France and Germany.
B)
Britain and Sweden.
C)
Italy and Greece.
D)
Spain and Portugal.
82.
The ERM crisis in ______ affected the ability of nations to ______.
A)
2001; fully fund their military forces
B)
1996; allow labor to migrate between nations
C)
1980; maintain a healthy banking system
D)
1992; maintain fixed exchange rates without drastic domestic measures
83.
As of 2016, there are ______ nations fully in the Eurozone, with ______ nations
remaining outside the currency union.
A)
40; 2
B)
19; 10
C)
35; 7
D)
10; 17
84.
The European Central Bank is located in ______, probably as a result of ______
influence on European monetary policy because of its above-average economic
performance.
A)
London; Britain's
B)
Paris; France's
C)
Frankfurt; Germany's
D)
Geneva; Switzerland's
Page 19
85.
The ECB has the following mandates, EXCEPT:
A)
use interest rates to implement the policy of price stability.
B)
use monetary policy to fulfill objectives of the European Union community.
C)
not be under the jurisdiction of any other European Union institution.
D)
finance deficits of member countries when needed.
86.
The primary objective of the ECB is to:
A)
promote economic growth.
B)
promote full employment.
C)
foster an equitable distribution of income.
D)
maintain price stability.
87.
What is the ECB prohibited from doing in the Eurozone?
A)
raising tariffs on goods from nonmember countries
B)
directly financing member countries fiscal deficits
C)
increasing interest rates
D)
decreasing interest rates
88.
Economists are concerned that a large cost to nations entering into a monetary union is:
A)
the inability to collect taxes.
B)
the inability to rescue banks or stimulate the economy via a lender-of-last-resort
mechanism.
C)
the tendency toward ever higher deficits.
D)
sticky prices.
89.
Criticisms of the ECB center on its primary focus on ______ with less (but perhaps
more needed) focus on _______.
A)
unemployment and GDP growth; exchange rates
B)
exchange rates; inflation problems
C)
price stability; unemployment and GDP growth
D)
political cohesiveness; price stability
90.
Technically, the ECB has a dual mandate of price stability and support of the European
economies; but in practice, it seems to favor ______ over ______.
A)
lowering unemployment; controlling inflation
B)
promoting equality; lowering unemployment
C)
price stability; economic performance, growth, and employment
D)
women's rights; lower taxes on small business
Page 20
91.
Controversy over the ECB includes all of the following, EXCEPT:
A)
its poor performance in controlling euro inflation.
B)
its lack of accountability for its actions.
C)
its remoteness from democratic control.
D)
the perception that the central bank does not focus on problems related to European
economic performance.
92.
How does the ECB choose to define price stability?
A)
Eurozone consumer price inflation of less than but close to 2% per year over the
medium term
B)
consumer price inflation of greater than but close to 3% per year over the medium
term in all Eurozone countries
C)
Eurozone consumer price inflation equal to 0% per year over the medium term
D)
Eurozone consumer price inflation less than but close to 5% per year over the
medium term
93.
Which of the policies of the U.S. Federal Reserve would most closely match the
monetary policy most often used by the ECB?
A)
open-market operations
B)
discount policy
C)
margin requirements
D)
reserve requirements changes
94.
The ECB, like the U.S. Federal Reserve, is ______, and unlike the U.S. Federal
Reserve, is not ______.
A)
independent; a lender of last resort
B)
subject to scrutiny by the legislature; able to lend to large corporations
C)
dependent on congressional approval for its policies; committed to price stability
D)
able to lend to member governments; able to lend directly to banks
95.
When the Bank of England's Mervyn King spoke of "inflation nutters," he was referring
to:
A)
a delicious cookie.
B)
overly inflation-fearful ECB leaders.
C)
insufficiently inflation-fearful ECB leaders.
D)
overly inflation-fearful Bank of England leaders.
Page 21
96.
In domestic economies, inflation bias often exists, which reduces the power of the
central bank to use monetary policy to stimulate economic activity. If an anti-inflation
nation such as Germany enters into a monetary union with such nations, what remedy is
there for this problem?
A)
Germany would have to conform with an activist monetary policy that gave
preference to economic performance.
B)
Germany could insist on the central bank being insulated from politics and
democratic control.
C)
Germany could insist that all central bank policies be reviewed by the Parliament.
D)
Germany would allow nations into the monetary union, even with their inflation
bias, because that would disappear quickly on joining the Eurozone.
97.
Having a nominal inflation target for monetary growth can pose a difficulty because:
A)
inflation is very challenging to measure.
B)
inflation can be higher or lower, depending on the growth rate of real GDP.
C)
most agree that inflation targets are completely unrelated to monetary growth.
D)
monetary growth can be affected by political pressure and other noneconomic
factors.
98.
The ECB would be unable to prevent a large banking crisis in the Eurozone because:
A)
it can print money but is prohibited from lending to banks or central banks in the
member states.
B)
crises of such proportions would require an international effort.
C)
deposits in banks in the Eurozone have FDIC insurance and are therefore out of the
control of the ECB.
D)
its assets are inadequate.
99.
A significant bank crisis in one Eurozone country is a problem for the ECB because:
A)
it will violate its money supply growth rule if it tries to provide liquidity to that
country's banks.
B)
it has no mandate to be a lender of last resort to financial institutions in the
Eurozone.
C)
it has no ability to affect the money supply in Eurozone countries.
D)
its consensus decision-making process may prompt too rapid a reaction to a crisis
in one country.
Page 22
100.
Other issues that exist within the ECB include all of the following, EXCEPT:
A)
the level of competence of officials.
B)
the lack of formal accountability.
C)
an insistence on consensus decisions, which could cause policy responses to lag.
D)
too much independence, causing other Eurozone entities to believe they have no
voice.
101.
The ECB has favored using ______ as a target for implementing monetary policy.
A)
money supply
B)
inflation targets
C)
unemployment figures
D)
fiscal deficits
102.
Some say the ECB draws too heavily on the German model. What is its major focus?
A)
reliance on the ability of the European parliament to engage in fiscal policy when
necessary
B)
the notion that the economy needs monetary stimulus to weather frequent
recessions
C)
that the unemployment problem, especially in Eastern Europe, should take priority
over price stability
D)
that price stability (low inflation) is the primary policy goal, separated from
political influence or having to address regional economic slowdowns
103.
A departure from the New Zealand model, in which the central bank implements an
inflation target set by the government, the ECB operates according to the German
model, in which the central bank:
A)
has ceded power to the administration.
B)
has authority to set and implement the inflation target.
C)
functions only in a technical sense.
D)
is replaced by a currency board.
104.
The ECB's focus on restraining inflation is, in large part, a result of:
A)
Europe's experience with inflation during the 1960s.
B)
Germany's experience with hyperinflation during the period between the first and
second world wars.
C)
the ECB's distrust of some of its smaller member countries (e.g., Finland,
Portugal).
D)
its monetary policy having no effect on economic growth.
Page 23
105.
Which of the following is one of the convergence criteria that countries needed to
satisfy to join the Eurozone?
A)
10 consecutive years in the ERM band without devaluation of its currency
B)
a government deficit of no more than 25% of GDP in the previous year
C)
total government debt of no more than 60% of GDP in the previous year
D)
an inflation rate of 0% in the previous 10 consecutive years
106.
The rules for joining the Eurozone specified monetary economic conditions that the
potential entrants had to achieve for admission. The convergence criteria of the ECB
were:
A)
moderate inflation, low unemployment, and adequate foreign currency reserves.
B)
no national debt and no current account deficits within the past five years.
C)
inflation rates roughly matching the lowest in the Eurozone, stable exchange rate
peg for two years, and equivalent long-term interest rates.
D)
a stable political situation, high GDP growth rate, and moderate unemployment.
107.
To satisfy the admission criteria to the European Union, a country must meet all of the
following, EXCEPT:
A)
maintain an inflation that is equal to the average of the three lowest rates.
B)
maintain long-term interest rates equal to that of the three countries with the lowest
inflation rates.
C)
maintain a pegged exchange rate, without any revision for two years.
D)
cut down taxes to the lowest possible level.
108.
The convergence criteria included that a country:
A)
should maintain a deficit of 6% of GDP.
B)
can have a debt level equal to 80% of GDP.
C)
can have a debt level equal to 60% of GDP.
D)
should maintain a deficit lower than 1% of GDP.
109.
Which of the following has NOT been a criticism of the "convergence process" for
joining the Eurozone?
A)
Although challenging, the process fully transforms inflation-biased nations into
fiscal and monetary conservatives.
B)
Policies forced on applicants to monetary union are politically costly, so the
interim peg may not be fully credible and may generate exchange rate crises.
C)
The fiscal rules are seen as inflexible and arbitrary.
D)
Once a nation has met the criteria, its commitment to fiscal discipline may wane.
Page 24
110.
The Maastricht rules specified budgetary rules such as meeting deficit and debt targets
because:
A)
nations that are able to keep spending down will probably have more money left
over to pay their Eurozone dues.
B)
nations that are fiscally sound will not be tempted to inflate their currency to
reduce the real burden of their debt.
C)
if one nation spends more and taxes less, population will tend to emigrate to that
nation.
D)
the ECB is prohibited from lending to nations, that nation may run out of available
credit.
111.
To prevent nations with an inflation bias from entering the Eurozone, the Maastricht
criteria for accession include:
A)
a trial period of joining the Eurozone to see how they fare.
B)
a three-month period of low interest rates.
C)
a lengthy trial period of demonstrated commitment to low inflation before joining.
D)
promises and written commitments to low deficits and debt reduction on entering.
112.
Suppose that there are two countries (Ireland and Belgium) negotiating the government
debt criteria for the Eurozone. Ireland has a high ratio of government debt to GDP;
Belgium has a low ratio of debt to GDP. Which country is likely to prefer a higher
inflation target?
A)
Belgium, because the real value of its government debt will approach zero faster
than Ireland's over time
B)
Ireland, because higher inflation will cause larger absolute reductions in the real
value of its government debt than in Belgium
C)
It makes no difference because high rates of inflation will have proportional effects
on the real debt of both countries.
D)
both, because each wants to see its real government debt decline
113.
Shortly after it was established, the Eurozone found that it needed greater power to
monitor and enforce discipline upon its members. In particular, which one of the
convergence criteria needed closer monitoring?
A)
no devaluation of a country's exchange rate
B)
an inflation rate no more than 1.5 percentage points higher than that in the three
member countries with the lowest rates of inflation
C)
a government deficit of no more than 3% of GDP
D)
a long-term interest rate no more than 2 percentage points higher than in the three
member countries with the lowest rates of inflation
Page 25
114.
The Stability and Growth Pact (SGP) adopted in 1997 addressed concerns related to the:
A)
tendency of nations to let their fiscal discipline promises slip once they had
attained Eurozone member status.
B)
micromanagement tendency of the ECB toward its members.
C)
loss of political power of the European Parliament.
D)
tendency of nations to revert to using their own national currencies.
115.
The Stability and Growth Pact (SGP) of 1997 proposed:
A)
only a budgetary surveillance process.
B)
no sanctions for "excessive deficit procedure."
C)
signing mandatory pledges to uphold the criteria.
D)
a budgetary surveillance process and sanctions for "excessive deficit procedure."
116.
Shortcomings and weaknesses of the SGP did NOT involve:
A)
the difficulty of correctly assessing a member's budgetary condition.
B)
the fact that transgressions and breaking rules had no sure consequences because
members tended to forgive their peer nations.
C)
nations refusing to allow their economies to go into recession to meet a Eurozone
budgetary target.
D)
the fact that transgressions and breaking rules had critical consequences to nations.
117.
The Stability and Growth Pact (SGP) was a failure because of all of the following
reasons, EXCEPT:
A)
surveillance failure.
B)
weak punishment.
C)
once countries joined the Eurozone, enforcement of rules was impossible.
D)
consultations between the Federal Reserve and the ECB broke down.
118.
Prior to 2008, some Eurozone nations were______; others were ______, which resulted
in ______.
A)
large external debtors; large external creditors; a credit-fueled boom
B)
irresponsible; trying to pick up the slack; lackluster overall performance
C)
inflation hawks; inflation biased; overall mild inflation
D)
worried the ECB was not minding the situation; not worried at all; some nations
exiting the Eurozone
Page 26
119.
The pre-2008 boom affected the Eurozone nations, many of which engaged in:
A)
fiscal restraint.
B)
overconsumption, excessive and wasteful construction, and asset speculation.
C)
tight monetary policies that resulted in recession.
D)
wage restraint policies that angered unions.
120.
The practice of the ECB and national central banks of preventing massive bank failures
after the financial crisis of 2008 had what effect on the affected economies?
A)
Prevention of bank failures greatly reduced the pain of the crisis for taxpayers.
B)
Prevention of bank failures ended up not saving most banks anyway.
C)
Banks resisted the takeover by the ECB and refused to make additional credit
available.
D)
Governments financed the bailouts by issuing more domestic debt, which caused
extreme fiscal problems.
121.
After the financial crisis of 2008, how did some Eurozone governments finance the
bailout of their financial sectors?
A)
by raising taxes
B)
by issuing new government bonds, which were purchased by private banks, funded
by ECB lending
C)
by printing more domestic currency to accompany infusions of euros from the ECB
D)
by selling foreign currency reserves and gold
122.
By early 2010, which of the following situations existed in the Eurozone debtor nations?
A)
They had resolved their bank failures and restored fiscal responsibility.
B)
They had sought and received help from the United States and the IMF to finance
their financial sector bailouts.
C)
They were in worse shape as debt grew to alarming levels, external investors were
worried, and their bond ratings plummeted.
D)
By that time, the debtor nations had repaid more than 90% of outstanding external
debt.
123.
Reasons for the ECB acceding to a bailout of troubled financial sectors in Eurozone
nations include all the following, EXCEPT:
A)
the desire to recognize bad loans by writing them off to protect the fragile fiscal
situation of the troubled nations.
B)
the desire to prevent a loss of confidence in euro-denominated debt.
C)
a desire to protect core EU banks.
D)
a desire to protect the collateral assets in the ECB portfolio.
Page 27
124.
A recent article in the Financial Times summarizes and criticizes the standard approach
to focusing responsibility for the Eurozone debt crisis, for which it blames:
A)
the operations of the ECB.
B)
the restraint on borrowing, which is an integral part of the Eurozone convergence
criteria.
C)
the irresponsibility of the ECB for funding domestic bank purchases of their
government's bond issues.
D)
speculators, irresponsible fiscal deficits, and poor risk assessment.
125.
A 2013 article in the Financial Times predicted that the post-2008 Eurozone debt crisis:
A)
is over and the benefits from the ordeal are valuable lessons about fiscal
responsibility.
B)
is capable of solution but far from over. The article blames the private financial
sector and denies that fiscal irresponsibility is the sole cause.
C)
is a bellwether of the decline and eventual collapse of the euro.
D)
teaches us that fiscal restraint is much more important than economic performance
or unemployment issues.
126.
Euro-optimists are convinced that with OCA criteria as guiding principles:
A)
Eurozone members will never again be caught in the trap of fiscal irresponsibility.
B)
the euro will strengthen against other world currencies to the extent that even
occasional debt issues will not affect it.
C)
greater market integration will bring about labor and capital mobility and increased
trade that will serve to strengthen the Eurozone.
D)
the ECB will be able to loosen its stranglehold and provide sufficient liquidity for
the Eurozone economies to thrive.
127.
Euro-optimists believe that the Eurozone has been successful because:
A)
it has not collapsed since its inception.
B)
the euro is becoming a reserve currency for foreign central banks.
C)
European inflation has fallen to 10% annually.
D)
there are no exit mechanisms for countries to leave the Eurozone.
128.
Euro-optimists believe the success of the euro to be the result of all of the following,
EXCEPT:
A)
more trade leads to more success for the euro.
B)
more countries are lining up to join the euro.
C)
more capital and labor mobility will take place under the euro.
D)
more scope for asymmetric shocks, rather than symmetric shocks.
Page 28
129.
Euro-pessimists believe that the Eurozone has been unsuccessful because:
A)
it has had little effect on already high intra-European trade.
B)
the euro is becoming a reserve currency for foreign central banks.
C)
European inflation has fallen to 10% annually.
D)
there are no exit mechanisms for countries to leave the Eurozone.
130.
Euro-pessimists have argued that the euro is not successful, based on all of the
following, EXCEPT:
A)
linguistic barriers make labor migration difficult.
B)
Maastricht Treaty rules have been largely abandoned.
C)
the deficit surveillance program has been a success.
D)
the lack of political support.
131.
Euro-pessimists point out that:
A)
rates of economic growth and inflation have converged to abysmally low levels in
all Eurozone countries.
B)
there are still wide differences in rates of economic growth and inflation among
Eurozone countries.
C)
the euro has appreciated considerably against the U.S. dollar.
D)
inflation rates have converged, but rates of economic growth have diverged among
Eurozone countries.
132.
In 2005:
A)
no Eurozone countries satisfied the criterion of having a government deficit of less
than 3% of GDP.
B)
all Eurozone countries satisfied the criterion of having a government deficit of less
than 3% of GDP.
C)
25% of Eurozone countries did not satisfy the criterion of having a government
deficit of less than 3% of GDP.
D)
only one Eurozone country satisfied the criterion of having a government deficit of
less than 3% of GDP.
133.
In 2005:
A)
no Eurozone countries satisfied the criterion of having a government debt of less
than 60% of GDP.
B)
all Eurozone countries satisfied the criterion of having a government debt of less
than 60% of GDP.
C)
more than half of Eurozone countries did not satisfy the criterion of having a
government debt of less than 60% of GDP.
D)
only one Eurozone country satisfied the criterion of having a government debt of
less than 60% of GDP.
Page 29
134.
A nation entering a currency union such as the Eurozone would find it difficult to exit at
a later time. Why?
135.
Explain the political benefits of a currency union.
136.
What is the role of fiscal transfers in making a currency union more or less sustainable?
137.
How does labor mobility play into an optimum currency area?
138.
Suppose a country with markets that are not highly integrated with asymmetric shocks
wants to join a currency union. Why might it make sense for the country to join one?
139.
Discuss the controversy over ECB accountability, the process by which the ECB is
controlled by the member states, and efforts of the individual nations to put pressure on
the ECB to consider other economic issues.
140.
Why is the ECB criticized over its decision-making process?
141.
In the European Union, as nations have stated intentions to join the Eurozone, the
convergence criteria have come under scrutiny. What are some of the controversies
surrounding the criteria?
142.
For a country with intentions to enter the Eurozone, what five criteria must be met?
143.
Explain why there is such an emphasis on inflation rates in setting forth the rules of the
game.
144.
What is the Stability and Growth Pact, and what prompted it?
145.
Explain how the actions of the ECB during the most recent crisis have created a moral
hazard problem.
Page 30
146.
Some are skeptical that measures in debt-ridden Eurozone economies will be sufficient
to restore sustainable fiscal balance. List and discuss reasons.
147.
Euro-pessimists are not convinced the euro will survive given the many pressures and
contradictions for an OCA. Explain and discuss.
148.
Euro-optimists admit the ambitious Eurozone project has problems, but they see net
benefits for the common currency area, whereas Euro-pessimists see more onerous
problems and intractable issues. Describe some of the arguments about the future of the
euro and the Eurozone.
Page 31
Answer Key
1.
B
2.
B
3.
C
4.
B
5.
C
6.
A
7.
D
8.
C
9.
B
10.
D
11.
B
12.
D
13.
B
14.
D
15.
C
16.
C
17.
D
18.
B
19.
B
20.
A
21.
C
22.
B
23.
A
24.
C
25.
A
26.
C
27.
D
28.
D
29.
D
30.
A
31.
D
32.
B
33.
D
34.
B
35.
C
36.
D
37.
D
38.
C
39.
B
40.
B
41.
D
42.
D
43.
C
44.
C
Page 32
45.
A
46.
C
47.
B
48.
C
49.
D
50.
B
51.
C
52.
B
53.
B
54.
D
55.
C
56.
A
57.
D
58.
D
59.
C
60.
A
61.
A
62.
B
63.
A
64.
C
65.
B
66.
C
67.
A
68.
D
69.
D
70.
C
71.
B
72.
C
73.
A
74.
C
75.
C
76.
D
77.
B
78.
D
79.
B
80.
B
81.
B
82.
D
83.
B
84.
C
85.
D
86.
D
87.
B
88.
B
89.
C
90.
C
Page 33
91.
A
92.
A
93.
B
94.
A
95.
B
96.
B
97.
B
98.
A
99.
B
100.
A
101.
B
102.
D
103.
B
104.
B
105.
C
106.
C
107.
D
108.
C
109.
A
110.
B
111.
C
112.
B
113.
C
114.
A
115.
D
116.
D
117.
D
118.
A
119.
B
120.
D
121.
B
122.
C
123.
A
124.
D
125.
B
126.
C
127.
B
128.
D
129.
A
130.
C
131.
B
132.
C
133.
C
134.
135.
136.
Page 34
137.
138.
139.
140.
141.
142.
143.
144.
145.
146.
147.
148.