16) Which one of the following statements is true for Norway, a non-euro country?
A) Of course, owners of capital that cannot be moved cannot avoid more of the economic stability loss
due to fixed exchange rates when Norway’s economy is open to capital flows.
B) Even owners of capital that cannot be moved can avoid more of the economic stability loss due to
fixed exchange rates when Norway’s economy is open to capital flows.
C) Owners of capital that cannot be moved can avoid more of the economic stability loss due to fixed
exchange rates when Norway’s economy is closed to capital flows.
D) Even owners of capital that can be moved can avoid more of the economic stability loss due to fixed
exchange rates when Norway’s economy is closed to capital flows.
E) Only owners of capital that can be moved can avoid more of the economic stability loss due to fixed
exchange rates when Norway’s economy is open to capital flows.
17) The intersection of GG and LL determines
A) the optimal level of integration desired by Norway.
B) the maximum integration level desired by Norway.
C) the minimum level of integration that will cause Norway to join the fixed exchange rate regime.
D) the maximum level of integration that will cause Norway to join the fixed exchange rate regime.
E) the maximum level of integration that can aid Norway if it joins the fixed exchange rate regime.
18) The level of fiscal federalism in the European Union is
A) too big to cushion member countries from adverse economic events.
B) too small to cushion member countries from adverse economic events.
C) appropriate to cushion member countries from adverse economic events.
D) too big relative to the one in the U.S.
E) similar in its level to that of the U.S.
19) A good measure of a country’s level of economic integration with a currency area is
A) the intersection of DD and GG.
B) the country’s price level.
C) the compatibility of economic policies.
D) the intersection of AA and GG.
E) the extent of trade between the joining country and the currency area and the ease with which labor
and capital can migrate between the joining country and the currency area.
20) A key barrier to labor mobility within Europe is
A) the laziness of Germans.
B) full employment in most European countries.
C) differences in language and culture.
D) lack of transportation.
E) the physical barriers in the landscape.
21) Which of the following statements is most accurate?
A) The countries of southern Europe are better endowed with capital and skilled labor than the countries
of northern Europe.
B) The countries of northern Europe are better endowed with capital and skilled labor than the countries
of southern Europe.
C) EU products that make intensive use of high-skill labor are most likely to come from Portugal.
D) EU products that make intensive use of low-skill labor are most likely to come from Great Britain.
E) The countries of eastern Europe are better endowed with capital and skilled labor than the countries
of western Europe.
22) A recent study by Andrew Rose of the University of California showed that, on average, two
countries that are members of the same currency union
A) trade three times as much with each other as countries that do not share a currency.
B) trade twenty times as much with each other as countries that do not share a currency.
C) trade ten times as much with each other as countries that do not share a currency.
D) trade six times as much with each other as countries that do not share a currency.
E) trade twice as much with each other as countries that do not share a currency.
23) Fiscal federalism in the EU refers to
A) one nation’s control of the monetary policy of all the other nations.
B) freedom of member countries to leave the EU at any time.
C) the transfer of economic resources from members with healthy economies to those suffering
economic setbacks.
D) one nation’s freedom to abandon the Euro and use its own currency.
E) the transfer of economic resources between members with healthy economies.
24) Shortly after their admission into the EMU, Ireland and the Netherlands
A) both seceded from the EMU.
B) were expelled due to high levels of debt.
C) breached the inflation convergence criterion that had qualified them for admission to the EMU in the
first place.
D) achieved inflation rates of zero percent.
E) abandoned the Euro as their national currency.
25) Which of the following best defines an optimum currency area?
A) a group of nations sharing the same currency
B) a group of regions in close proximity to each other.
C) a group of regions who operate under similar economic policies.
D) a group of regions with economies closely linked by factor mobility and by trade in goods and
services
E) a group of nations that engage in free trade with each other
26) Which of the following statements is most accurate?
A) A rise in the size and frequency of country-specific disturbances to the joining country’s product
markets raises the critical level of economic integration at which the exchange rate area is joined.
B) A rise in the size and frequency of country-specific disturbances to the joining country’s product
markets lowers the critical level of economic integration at which the exchange rate area is joined.
C) A decline in the size and frequency of country-specific disturbances to the joining country’s product
markets raises the critical level of economic integration at which the exchange rate area is joined.
D) A rise in the size and frequency of country-specific disturbances to the joining country’s product
markets has no effect on the critical level of economic integration at which the exchange rate area is
joined.
E) A decline in the size and frequency of country-specific disturbances to the joining country’s product
markets does not affect the level of economic integration at which the exchange rate area is joined.
27) Which of the following statements is most accurate?
A) A low degree of economic integration between a country and the fixed exchange rate area that it joins
reduces the resulting economic stability loss due to output market disturbances.
B) A high degree of economic integration between a country and the fixed exchange rate area that it
joins reduces the resulting economic stability loss due to output market disturbances.
C) A high degree of economic integration between a country and the fixed exchange rate area that it
joins increases the resulting economic stability loss due to output market disturbances.
D) A complete lack of economic integration between a country and the fixed exchange rate area that it
joins reduces the resulting economic stability loss due to output market disturbances.
E) A low degree of economic integration between a country and the fixed exchange rate area that it joins
increases the resulting economic stability loss due to output market disturbances.
28) The theory of optimum currency areas predicts that
A) floating exchange rates are most appropriate for areas closely integrated through international trade
and factor movements.
B) fixed exchange rates are most appropriate for areas that are loosely integrated through international
trade and factor movements.
C) fixed exchange rates are most appropriate for areas closely integrated through international trade and
factor movements.
D) floating exchange rates are most appropriate for all countries in Europe.
E) fixed exchange rates are most appropriate for all countries in Europe.
29) Why does the GG schedule have a positive slope?
A) The monetary efficiency gain a country gets by joining a fixed exchange rate area falls as its
economic integration with the area increases.
B) The monetary efficiency gain a country gets by joining a fixed exchange rate area rises as its
economic integration with the area decreases.
C) The monetary efficiency gain a country gets by joining a fixed exchange rate area rises as its
economic integration with the area increases.
D) The monetary efficiency gain a country gets by joining a floating exchange rate area rises as its
economic integration with the area increases.
E) The monetary efficiency gain a country gets by joining a fixed exchange rate area is constant after
their integration into the area.
30) Why does the LL schedule have a negative slope?
A) The economic stability loss from pegging to the area’s currencies rises as the degree of economic
interdependence rises.
B) The economic stability loss from pegging to the area’s currencies falls as the degree of economic
interdependence rises.
C) The economic stability loss from pegging to the area’s currencies falls as the degree of economic
interdependence falls.
D) The economic stability loss from pegging to the area’s currencies rises as the degree of economic
activity increases.
E) The economic stability loss from pegging to the area’s currencies is constant, even as the degree of
economic activity increases.
31) Who described 5 economic tests that must be passed before Britain would adopt the Euro?
A) Tony Blair
B) Robert Mundell
C) Gordon Brown
D) Charles Bean
E) none of the above
32) In 2003,
A) the UK became a member of EMU since the 5 economic tests were passed.
B) the UK became a member of EMU despite not passing the 5 economic tests.
C) the UK did not become a member of EMU even though all 5 economic tests were shown to be
satisfied.
D) the UK did not become a member of EMU since it was not clear that the 5 economic tests were
passed.
E) the UK became a member of EMU after prolonged negotiations.
33) Which of the following statements is the most accurate?
A) Trade of EU countries with other EU countries has increased since the euro was introduced.
B) Trade of EU countries with other EU countries has decreased since the euro was introduced.
C) Trade of EU countries with other EU countries has increased in some years and decreased in other
years since the euro was introduced.
D) Trade of EU countries with other EU countries can no longer be measured since both trading parties
have the same currency.
E) Trade of EU countries with North American countries has decreased since the euro was introduced.
34) Richard Baldwin’s estimate was that the euro increased the trade level of its users by
A) only 5 percent.
B) only 9 percent.
C) over 30 percent.
D) over 50 percent.
E) only 12 percent.
35) “The costs and benefits for a country from joining a fixed-exchange rate area such as the EMS
depend on how well-integrated its economy is with those of its potential partners.” Discuss.
36) Discuss the benefits and costs of joining a fixed-exchange area.
37) Explain why when Norway unilaterally fixes its exchange rate against the euro but leaves the krone
free to float against the non-euro currencies, it is unable to keep at least some monetary independence.
38) Explain why after, say Norway unilaterally pegs the krone to the euro, domestic money market
disturbances will no longer affect domestic output despite the continuation of float-rate regime against
non-euro currencies.
39) Explain why even owners of capital that cannot be moved can avoid more of the economic stability
loss due to fixed exchange rates when Norway’s economy is open to capital flows.
40) Explain why the oil price shocks after 1973 made countries unwilling to revive the Bretton Woods
system of fixed exchange rates. See also Chapter 19.
41) Explain why it may make sense for the United States, Japan, and Europe to allow their mutual
exchange rate to float?
42) Is Europe an optimum currency area?
43) How mobile is Europe’s labor force?
44) How much trade do currency unions create?
45) Explain why the European Union’s current combination of rapid capital migration with limited labor
migration may actually raise the cost of adjusting to product market shocks without exchange rate
change?
46) “Given that labor remains relatively immobile within Europe, the European Union’s success in
liberalizing its capital flows may have worked perversely to worsen the economic stability loss due to
the process of monetary unification.” Discuss.
47) Explain what the GG-LL model tells us about the benefits of extensive trade between EU member
states and comment on the significance of similarity of economic structure in this framework.
48) Explain the theory of optimum currency areas.
49) What is one way to offset the economic stability loss due to fixed exchange rates?
50) Using the GG-LL framework, analyze the effect of an increase in the size and frequency of sudden
shifts in the demand for a country’s exports.
51) Using the GG-LL framework, analyze the effect of Libya subsidizing the Pakistani Nuclear
programs.
52) Draw the graph of the GG and LL schedules and explain the logic behind the slopes of each of the
schedules.
53) Discuss the trends and implications of the following graph, especially with respect to the official
start of the EMU on January 1, 1999.
20.4 The Future of EMU
1) Which of the following is not true about the future of the EU and its associated institutions?
A) The lack of a strong EU political center may limit the ECB’s political legitimacy in the eyes of the
European public.
B) There is a danger that voters throughout Europe will come to view the ECB as a distant and
politically unaccountable group of technocrats unresponsive to people’s needs.
C) Asymmetric economic development within different countries of the euro zone will be hard to handle
through monetary policy.
D) Persistent barriers to labor mobility might continue to result in high levels of unemployment.
E) The majority of Europeans do not support the currency union.
2) The problem of asymmetric shocks in Canada in the 2000s
A) could be mitigated by appreciating the western currency against the eastern currency (if only separate
currencies existed)
B) highlights the need for flexible exchange rates
C) was aggravated by increased inter-regional factor mobility
D) was solved in time for the 2010 Olympics
E) was solved by the secession of Quebec.
3) The recent situation in Canada has been:
A) “dwindling investment in oil sands projects in Northern Alberta, while growth has blossomed in the
industrial heartland of Ontario and Quebec.”
B) “heavy investment in oil sands projects in Northern Alberta, and blossoming growth in the industrial
heartland of Ontario and Quebec.”
C) “heavy investment in oil sands projects in Northern Alberta, but growth has stagnated in the
industrial heartland of Ontario and Quebec.”
D) “dwindling investment in oil sands projects in Northern Alberta combined with stagnant growth in
the industrial heartland of Ontario and Quebec.”
E) None of the above describe the recent situation in Canada.
4) Discuss the problems that the EMU will face in the coming years.
5) Discuss some of the main reasons why EU countries have favored mutually fixed exchanged rates
over other exchange rate policies.
6) Describe the problem and possible solution to the asymmetric shocks hitting Canada in the 2000s?