True/False Indicate whether the
sentence or statement is true or false.
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1.
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The single European currency – the euro
– came into existence on 1 January 2002.
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2.
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In the context of the Single European Market
project, the single European Currency was seen as a final step towards completing the single
market.
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3.
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Because international capital flows are so huge,
currency pegs such as the Exchange Rate Mechanism are always vulnerable to speculative
attacks.
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4.
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The people who would lose their jobs working on
currency transactions if the UK to join the European EMU represent a significant cost of adopting the
euro.
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5.
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The major cost to the UK of joining the euro would
be the loss of the freedom for the country to set its own monetary policy and the loss of the
possibility of needed adjustments in the UK economy being achieved through changes in the foreign
exchange value of the UK currency.
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6.
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In 2004 Germany had a lower degree of trade
integration with the other EU countries than did the UK
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7.
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Since the European EMU was established the degree
of capital market integration among EMU member countries has increased substantially at both the
level of the wholesale financial markets and the level of the retail financial markets.
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8.
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The free rider problem that arises in a currency
union is that a member government that borrows heavily may not be obliged to pay as high a rate of
interest on its borrowing as it would if it were not a member of the currency union, while the other
governments of the currency union find the financial markets require them to pay higher interest on
their borrowing because of the high borrowing of one of their neighbours.
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9.
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Eurozone countries in breach of the excessive
deficit criterion could be subject to a fine of up to 1% of their GDP under the Stability and Growth
Pact.
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10.
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Some of the criteria for deciding whether a group
of economies constitute an optimum currency area are probably endogenous.
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Multiple Choice Identify the
letter of the choice that best completes the statement or answers the question.
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11.
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Before Economic and Monetary Union (EMU) most EU
member countries participated in something called
a. | the European Common Currency
Area. | b. | the Exchange Rate Model. | c. | the European Monetary Union. | d. | the Exchange Rate Mechanism. | e. | the European Union Mechanism. |
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12.
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Which of the following was not a goal of the EU in
passing the 1986 Single European Act to complete the Single European Market (SEM)?
a. | The approximation of relevant laws, regulations and
administrative provisions between member states. | b. | A common, EU-wide competition policy, administered by the European
Commission. | c. | A common, EU-wide
agricultural policy. | d. | The free movement
of goods, services, labour and capital between EU member states. | e. | A system of common external tariffs implemented against countries that are not
members of the EU. |
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13.
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Which one of the following is rightly considered a
cost of a single currency?
a. | The loss of the freedom for countries joining the single
currency to set their own fiscal policies. | b. | The loss of the
freedom for countries joining the single currency to set their own monetary
policies. | c. | Higher unemployment. | d. | The loss of jobs involved in currency transactions. | e. | Higher inflation. |
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14.
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Which one of these benefits of a single currency is
not correctly explained?
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. |
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15.
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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
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. |
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16.
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If two countries, A and B, are members of a
currency union and there is a shift in consumer preferences away from the goods of country A and
towards those of country B, then which one of the following would help to offset the effect of the
resulting changes in aggregate demand in A and B on inflation and unemployment in the two
countries?
a. | A high degree of labour mobility between the two
countries. | b. | An increase in
government spending in country A. | c. | A depreciation in
the foreign exchange value of the common currency. | d. | A low degree of capital mobility between the two
countries. | e. | A cut in taxes in
both countries. |
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17.
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Which of the following could not be described as an
asymmetric macroeconomic shock?
a. | None of these answers. All of them are asymmetric
macroeconomic shocks. | b. | A sudden and
substantial fall in the worldwide demand for French wine. | c. | An epidemic of an animal disease in a country that significantly reduces the
country’s agricultural output. | d. | A hurricane that
disrupts economic activity in the USA. | e. | A sudden and
substantial rise in prices on the world oil market. |
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18.
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A high degree of real wage flexibility will tend to
reduce the costs to a country of joining a currency union because
a. | all of the reasons given in these answers are
correct. | b. | real wages fall rapidly in a recession and the economy
moves quickly back to long-run equilibrium, so limiting the duration of the recession even when
exchange rate adjustment is not possible. | c. | workers will move
from a country in which aggregate demand falls to other countries of the currency union, and so
unemployment remains lower than it otherwise would. | d. | real wages fall and so offset the inflationary effect of switching from the
old currency to the new common currency. |
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19.
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Which one of the following is not a characteristic
that reduces the cost of a single currency?
a. | A high degree of labour mobility among the countries of
the common currency area. | b. | A high degree of
capital mobility among the countries of the common currency area. | c. | None of the characteristics described in these answers – they are all
characteristics that reduce the cost of a single currency. | d. | Synchronized economic cycles in the countries of the common currency
area. | e. | A high degree of trade integration among the countries
of the common currency area. |
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20.
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How does the eurozone compare with the USA as a
possible optimal currency area (OCA)?
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. |
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21.
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What is fiscal federalism?
a. | A fiscal system for a group of countries in which fiscal
policy is set in a treaty signed by all the countries. | b. | A fiscal system for a group of countries in which government budget deficits
are strictly limited. | c. | A fiscal system
for a group of countries involving a common fiscal budget and a system of taxes and fiscal transfers
across countries. | d. | A fiscal system in
which fiscal policy is jointly determined by local and national
politicians. | e. | A fiscal system
for a group of countries in which fiscal policy is set by the central
bank. |
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22.
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Which of the following is a problem for fiscal
policy in a 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. |
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23.
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To try to overcome the free rider problem, the
members of EMU signed
a. | the stability and growth
pact. | b. | the European solidarity pact. | c. | the exchange rate mechanism pact. | d. | the responsibility and growth pact. | e. | the fiscal stability pact. |
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24.
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Which of the following is a problem for monetary
policy in a currency union?
a. | Money supply is more difficult to control in a currency
union. | b. | The inflation-unemployment trade-off is more unstable in
a currency union. | c. | All of these
answers describe problems for monetary policy in a currency union. | d. | The interest rate may be higher than is appropriate for economic conditions in
some countries while it’s lower than is appropriate in some others – monetary policy must
be “one size fits all”. | e. | Monetary policy
will affect the economy with a longer time lag in a large currency union than in a single
country. |
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25.
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Which one of the following is not an argument in
support of the UK joining the EMU?
a. | None of these arguments – they are all arguments
in support of the UK joining the EMU. | b. | The
characteristics of the UK housing market make UK consumers’ expenditure very sensitive to
changes in interest rates. | c. | The UK risks
exclusion from the Euroland capital market with damaging consequences for the City of
London. | d. | The UK needs to be a member of the EMU in order to
continue to attract such a large share of foreign direct investment in EU
countries. | e. | The UK would
benefit from increased trade with the eurozone countries, boosting
GDP. |
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