Macro Multiple Choice

Which of the following best explains the “domino effect” described in Chapter 1?

External trade diversion pressures non-members to join

Which event most strongly accelerated Eastern European interest in joining the EU?

The collapse of the Soviet Union

Which statement about the EU budget is correct?

It relies heavily on national contributions (GNI-based resources)

The “impossible trinity” states that a country cannot simultaneously maintain

Free capital mobility, a fixed exchange rate, and monetary independence

Under the impossible trinity, a monetary union implies that

Members sacrifice exchange-rate autonomy

Purchasing Power Parity predicts that in the long run

Countries with higher inflation will depreciate their currency

Which aspect of the Gold Standard is most similar to today’s Eurozone?

External imbalances required domestic price/wage adjustment

The failure of the interwar Gold Exchange Standard was largely due to

Misaligned exchange-rate restorations after WWI

The EMS ultimately collapsed because

Capital controls were removed

The central question of OCA theory is

Whether countries benefit economically from sharing a currency

One major benefit of a currency area is

Lower transaction costs and elimination of exchange-rate uncertainty

One major cost of a currency area is

Loss of the exchange-rate adjustment tool

According to the OCA criteria, which condition increases the desirability of a currency union?

High openness to trade with other members

A key principle for ECB monetary policy is

To maintain price stability

Which is not one of the five convergence criteria for joining the euro?

Balanced government budget

The ECB’s primary monetary policy instrument is

Open market operations

Fiscal externalities in a monetary union arise because

One country’s fiscal policy affects inflation and interest rates in the entire union

Under the original SGP, member states were required to

Maintain budget deficits below 3% of GDP

A fiscal policy is pro-cyclical when

Fiscal actions amplify the business cycle

Which mechanism acts as an automatic stabilizer?

Progressive taxation

Which structural feature of financial markets most contributed to the rapid international spread of the 2008 crisis after Lehman’s collapse

Cross-border interbank exposures created systemic interdependence

During the Great Moderation, why did banks increasingly underestimate risk, contributing to the subprime crisis?

Expectations of permanent house-price increases reduced perceived default risk

Why did information asymmetry intensify the credit freeze after 2007?

Lenders believed other banks held toxic assets and therefore avoided interbank lending

Why did fiscal stimulus following the global crisis lead to the emergence of sovereign-debt tensions in some EU countries?

Market participants doubted long-run sustainability of deficit-financed expansions

Why did Greece’s revised 2009 deficit announcement trigger a discontinuous increase in yields rather than a gradual repricing?

Investors revised expectations of Eurozone bailout rules immediately

Why did contagion spread from Greece to countries like Portugal, Ireland, and Spain despite different fiscal fundamentals?

Fragmented markets led investors to treat them as a correlated risk cluster

Why did Ireland’s blanket guarantee of bank liabilities in 2008 severely worsen its sovereign-debt position?

It transferred private losses directly to government balance sheets

Why did European policy responses in 2010-2012 face significant delays compared to those in the United States

Lack of unified fiscal and political decision structure

Which feature of the Eurozone crisis distinguishes it from the initial global financial crisis?

Driven partly by institutional design flaws

Why did the ECB’s initial response to the global financial crisis appear more conservative than that of the Federal Reserve?

The ECB prioritized avoiding inflation risks amid uncertainty

What key factor explains why Spain and Ireland experienced severe crises despite previously strong fiscal positions?

Banking-system exposure to real-estate bubbles

Which structural feature of the Eurozone complicated the response to asymmetric shocks during the crisis?

Lack of a centralized fiscal capacity