Monetary Union MCQs

Option A: Money supply is more difficult to control in a currency union.

Option B: The inflation-unemployment trade-off is more unstable in a currency union

Option C: All of these answers describe problems for monetary policy in a currency union

Option 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

Correct Answer: 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 ✔

Option A: The central bank controls interest rates on long-term bonds issued by the governments of the member countries of the currency union

Option B: Government of the member countries of the currency union may run large budget deficit and so crowd out private investment

Option C: government 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

Option D: It is difficult to raise enough tax revenue to pay for the operation of the currency union

Correct Answer: government 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 ✔

Option A: A fiscal system for a group of countries in which fiscal policy is set in a treaty signed by all the countries

Option B: A fiscal system for a group of countries in which government budget deficits are strictly limited

Option C: A fiscal system for a group of countries involving a common fiscal budget and a system of taxes and fiscal transfers across countries

Option D: A fiscal system in which fiscal policy is jointly determined by local and national politicians

Correct Answer: A fiscal system for a group of countries involving a common fiscal budget and a system of taxes and fiscal transfers across countries ✔

Option A: A high degree of labour mobility among the countries of the common currency area

Option B: A high degree of capital mobility among the countries of the common currency area

Option C: None of the characteristics described in these answers They are all characteristics that reduce the cost of a single currency

Option D: A high degree of trade integration among the countries of the common currency area

Correct Answer: A high degree of trade integration among the countries of the common currency area ✔

Option A: None of these answers All of them are asymmetric macroeconomic shocks

Option B: A sudden and substantial fall in the worldwide demand for French wine

Option C: An epidemic of an animal disease in a country that significantly reduces the country’s agricultural output

Option D: A sudden and substantial rise in prices on the world oil market

Correct Answer: A sudden and substantial rise in prices on the world oil market ✔

Option A: None of these arguments they are all arguments in support of the UK joining the UMU

Option B: The characteristics of the UK housing market make UK consumers expenditure very sensitive to changes in interest rates

Option C: The UK risks exclusion from the Euroland capital market with damaging consequences with damaging

Option D: The UK needs to be a member of the EMU in order to continue to attract such large share of foreign direct investment in EU countries

Correct Answer: The characteristics of the UK housing market make UK consumers expenditure very sensitive to changes in interest rates ✔

Option A: the stability and growth pack

Option B: the European solidarity packs

Option C: the exchange rate mechanism pact

Option D: the responsibility and growth pack

Correct Answer: the stability and growth pack ✔

Option A: The eurozone has a higher degree of labour mobility than the USA and labour law is much less restrictive in the erozone than in the USA On these measures the eurozone is more likely to be an OCA than is the USA

Option B: The eurozone has a lower degree of labour mobility than the USA and labour law is much more restrictive in the erozone than in the USA On these measures the eurozone is less likely to be an OCA than is the USA

Option C: The eurozone has a higher degree of labour mobility than the USA but labour law is much more restrictive in the erozone 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

Option D: The eurozone has a lower degree of labour mobility than the USA and labour law is much less restrictive in the erozone 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

Correct Answer: The eurozone has a lower degree of labour mobility than the USA and labour law is much more restrictive in the erozone than in the USA On these measures the eurozone is less likely to be an OCA than is the USA ✔

Option A: All of the reasons given in these answers are correct

Option 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

Option 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

Option D: real wages fall and so offset the inflationary effect of switching from the old currency to the new common currency

Correct Answer: 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 ✔

Option A: A high degree of labour mobility between the tow countries

Option B: An increase in government spending in country (A)

Option C: A depreciation in the foreign exchange value of the common currency

Option D: A low degree of capital mobility between the two countries

Correct Answer: A high degree of labour mobility between the tow countries ✔