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Chapter 19: Monetary Unions
MULTIPLE CHOICE
1. Which of the following is not one of the European Monetary Union convergence criteria?
a. Price stability.
b. Low employment rate.
c. Reasonable level of government budget deficit.
d. Reasonable level of government debt.
2. Which of the following is not a specific policy goal of the European Central Bank?
a. Price stability defined as inflation no higher than 2 percent.
b. Money supply growth target.
c. Promotion of economic growth.
d. None of the above.
3. Which of the following bodies of the European Central Bank formulates monetary policy
within the European Monetary Union?
a. The Executive Board.
b. The Governing Council.
c. The General Council.
d. The Presidency.
4. Which of the following is not a characteristic of an optimum currency area?
a. Fiscal integration.
b. Symmetrical business cycles.
c. Low labor mobility.
d. High capital mobility.
5. Why is the European Monetary Union not an optimum currency area?
a. Both labor and physical capital are less mobile among the countries of the EMU than
among the states of the United States.
b. The budget of the European Union is relatively large in proportion to the size of the
economies involved.
c. Business cycles among the members of the EMU are symmetrical.
d. The EMU has crises.
6. In the European Monetary Union, which of the following is not available to member
countries to fight recession?
a. Expansionary fiscal policy.
b. Labor mobility.
c. Expansionary European Central Bank monetary policy.
d. Expansionary national central bank monetary policy.
7. Which of the following is not a part of the “Eurosystem?”
a. The European System of Central Banks.
b. The European Central Bank.
c. The national central banks of the European Monetary Union.
d. The European Central Bank Governing Council.
8. Which of the following countries is not a member of the European Monetary Union?
a. Austria.
b. United Kingdom.
c. Estonia.
d. Malta.
9. In which of the following regions do we find monetary unions that are larger than the
cases of mini-states?
a. Latin America.
b. Central Asia.
c. Africa.
d. South Asia.
TRUE/FALSE
1. Like the United States Federal Reserve, the European Central Bank does not have a
specific inflation rate target.
2. Member states of the European Union who join the European Monetary Union lose their
ability to conduct their own monetary policy.
3. The Stability and Growth Pact prescribes European Monetary Union members to limit
fiscal deficits to 3 percent of GDP.
4. In the European Monetary System (EMS) of 1978, the members pegged their currencies
to the European Currency Unit (ECU).
5. Under the European Monetary Union, a member country cannot adjust from a negative
external shock by using expansionary monetary policy.
6. Under the European Monetary Union, a member country can fight recession and
unemployment by devaluing its currency.
7. Under the European Monetary Union, a member country attempting to combat recession
and unemployment is limited in its use of expansionary fiscal policy.
8. Like the European Monetary Union, the Communauté Financière Africaine (CFA) franc
zone is based on a flexible exchange rate to other currencies.
9. Thanks to the European Monetary Union, Europe escaped any contagion effects from the
2007-2009 financial crisis.
10. Any contagion effects form the 2007-2009 financial crisis were largely confined to the
newer European Monetary Union members in Eastern Europe.
SHORT ANSWER
1. The original plan by Pierre Werner was to establish the European Monetary Union by
1980. What events transpired to make the plan difficult to implement? What role did the
“snake in a tunnel” play in these events?
2. What were the elements of the 1978 European Monetary System (EMS)?
3. What were the elements of the European Monetary System (EMS) crisis of 1992-1993.
4. What are the four ways that, under the European Monetary Union (EMU), member
countries can adjust to economic downturns and unemployment?
ANS:
5. Why is the European Monetary Union (EMU) not considered to be an optimal currency area
(OCA) by many economists?
6. Which EMU countries were most affected by the 2007-2009 global financial crises and
how were they affected?
7. What types of difficulties did the Communauté Financière Africaine (CFA) franc zone
experience after its establishment?
