INT ECON - International macro cooperation

The principal challenge facing the euro and at the heart of crises in the eurozone is

 a) Member states have failed to obey guidelines on GDP growth.

 b) Many countries have, after having adopted the euro, violated the convergence criteria by running large budget deficits and accumulating debt.

 c) The ECB has been too flexible in meeting its primary treaty mandate.

 d) Candidates for adoption of the euro have, over the past decade, made no progress towards convergence.

 b) Many countries have, after having adopted the euro, violated the convergence criteria by running large budget deficits and accumulating debt.

Which of the following has not been a criticism of the "convergence process" for joining the Eurozone?

 a) The fiscal rules are seen as inflexible and arbitrary.

 b) Although challenging, the process fully transforms inflation-biased nations into fiscal and monetary conservatives.

 c) 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.

 d) Once a nation has met the criteria, its commitment to fiscal discipline may wane.

 b) Although challenging, the process fully transforms inflation-biased nations into fiscal and monetary conservatives.

The ECB has the following mandates except

 a) not be under the jurisdiction of any other European Union institution.

 b) use interest rates to implement the policy of price stability.

 c) use monetary policy to fulfill objectives of the European Union community.

 d) finance deficits of member countries when needed.

 d) finance deficits of member countries when needed.

Which of the following is one of the convergence criteria that countries needed to satisfy to join the Eurozone?

 a) a government deficit of no more than 25% of GDP in the previous year

 b) total government debt of no more than 60% of GDP in the previous year

 c) an inflation rate of 0% in the previous 10 consecutive years

 d) 10 consecutive years in the ERM band without devaluation of its currency

 b) total government debt of no more than 60% of GDP in the previous year

Concerning ERM II, which of the following is true?

 a) Hungary and the Czech Republic are among those countries with a euro derogation and which are assessed periodically on their ability to meet convergence criteria.

 b) The UK is technically in violation of the euro requirement in the Maastricht Treaty.

 c) Denmark and Sweden have an opt-out from the requirement to work towards adoption of the euro.

 d) The ERM II band requirement for a non-euro EU member's currency is ±2.25% of the euro.

 a) Hungary and the Czech Republic are among those countries with a euro derogation and which are assessed periodically on their ability to meet convergence criteria.

France’s choice to maintain its ERM peg despite Britain's exit from the ERM demonstrated its

 a) inability to sever its economic ties to Germany.

 b) commitment to floating exchange rates.

 c) lack of commitment to an integrated Europe.

 d) willingness to risk recession to preserve and enhance closer European ties.

 d) willingness to risk recession to preserve and enhance closer European ties.

If Britain had not joined the ERM, the policy options it would have had available to avoid recession would have been

 a) more numerous and varied.

 b) subject to veto by the European Parliament.

 c) in conflict with its desire to maintain a stable economy.

 d) severely limited.

 a) more numerous and varied.

The text compares the macroeconomic performance of Great Britain and France immediately following Great Britain's departure from the ERM in 1992. What does it conclude?

 a) The rate of growth of real GDP was lower in France than in Great Britain.

 b) The rates of growth of real GDP were equal in France and in Great Britain.

 c) GDP growth in both Great Britain and France increased dramatically after Great Britain withdrew from the ERM.

 d) The rate of growth of real GDP was higher in France than in Great Britain.

 a) The rate of growth of real GDP was lower in France than in Great Britain.

Britain's decision to exit the ERM in September 1992 had what effect?

 a) It had no effect on Britain's economy.

 b) Lower interest rates and a depreciated exchange rate caused the British economy to expand.

 c) It caused the system to collapse.

 d) It subjected Britain to a ruling by the European Courts of Justice.

 b) Lower interest rates and a depreciated exchange rate caused the British economy to expand.

Prices in the European ERM countries on fixed exchange rates have converged ___ than for nations outside the ERM.

 a) less completely

 b) more rapidly

 c) more slowly

 d) more completely

 b) more rapidly

The fiscal shock in Germany due to reunification caused the Bundesbank to pursue a monetary policy that

 a) was appropriate only for Germany, since neither Britain nor other ERM nations experienced a similar shock.

 b) was appropriate for Britain, since it had experienced a similar shock.

 c) had poor timing, since the monetary action should have come before the reunification.

 d) was appropriate for all the other ERM nations but not Britain.

 a) was appropriate only for Germany, since neither Britain nor other ERM nations experienced a similar shock.

During Britain's brief alignment with the ERM from 1990 to 1992, the trilemma tells us that monetary policy authority no longer existed in Britain. Why?

 a) The British interest rate equaled the German rate to attain uncovered interest parity.

 b) Britain could print more pounds, but it could not increase its gold stock.

 c) Britain kept monetary growth rates at zero.

 d) The British could lower unemployment using other means such as fiscal policy.

 a) The British interest rate equaled the German rate to attain uncovered interest parity.

Because of the ERM, if Britain had desired to maintain fixed exchange rates, then what would it have had to do after German reunification?

 a) It would have changed over to an exchange rate regime based on gold.

 b) It would have increased its interest rate and followed the central country's lead.

 c) It would have decreased its interest rate to stimulate its economy.

 d) It would have ignored the increase in the German interest rate and hoped for the best.

 b) It would have increased its interest rate and followed the central country's lead.

Since Britain withdrew from the ERM in 1992, what has it done with regard to fixing its exchange rates?

 a) Britain has retained its independent pound currency and not joined the currency union of Europe.

 b) Britain has put the pound back on solid footing by backing it with gold.

 c) Britain has abandoned its own monetary authority for the certainty of fixed exchange rates with its largest trading partners.

 d) Britain has joined with the euro, forgoing its long-standing independence.

 a) Britain has retained its independent pound currency and not joined the currency union of Europe.

The British experience in 1992 demonstrates that fixed exchange rates

 a) preclude autonomous monetary policy.

 b) reduce economic integration across countries.

 c) enable countries to moderate the impacts of external shocks.

 d) reduce currency stability in the face of external shocks.

 a) preclude autonomous monetary policy.

Great Britain opted out of the ERM in 1992 because its government concluded that

 a) it wanted to increase its trade with North America rather than Europe.

 b) the benefits of the ERM outweighed the costs of higher German interest rates.

 c) it was unable to agree with the French on an exchange rate between the pound and the French franc.

 d) the costs associated with higher German interest rates outweighed the gains from being a member of the ERM.

 d) the costs associated with higher German interest rates outweighed the gains from being a member of the ERM.

Europe's ERM, which preceded the advent of the euro, was a weighted basket of European currencies, the most important of which was

 a) the French franc.

 b) the British pound.

 c) the U.S. dollar.

 d) the Deutsche Mark.

 d) the Deutsche Mark.

The Exchange Rate Mechanism (ERM) was

 a) a fixed exchange rate system in use in the 1960s.

 b) an attempt to bring all countries under a fixed exchange rate system.

 c) a fixed exchange rate system in Europe, with the British pound as the anchor currency.

 d) a fixed exchange rate system in Europe, with the Deutsche Mark as the anchor currency.

 d) a fixed exchange rate system in Europe, with the Deutsche Mark as the anchor currency.

ERM II, the current exchange rate mechanism in force in the EU, uses the ____ as its anchor currency and requires that countries participating in ERM II keep their currency fluctuations relative to the anchor currency within at most ____ .

 a) euro; 15%

 b) Deutsche Mark; 2.5%

 c) Deutsche Mark, 15%

 d) euro; 2.5%

 a) euro; 15%

Countries adopting the euro have seen their inflation rates trend ____ and ____ each others' since the adoption of the euro compared to before the introduction of the euro.

 a) higher; farther from

 b) lower; closer to

 c) lower; farther from

 d) higher; closer to

 b) lower; closer to