European Macroeconomics

Make a list of all the EU treaties (with dates) and provide a ten-words-or-less explanation of each treaty's major contribution to European integration.

- First, the Treaty of Rome (1957) established the European Economic Community. - The Single European Act (1986) made decision making and policy changes that completed the internal market. - The Maastricht Treaty (1992) set the EU on the path to adoption of the euro. - The Amsterdam Treaty (1997) made minor institutional reforms in preparation for enlargement. - The Nice Treaty (2000) made further minor reforms in preparation for enlargement. - Finally, the Lisbon treaty (2007) made attempts to reform the EU's institutional structures.

Which of the following propositions is true? A. Symmetric shocks are not a problem in a currency area, especially if national preferences are homogenous. B. The borders of an optimal currency area must coincide with political borders. C. Adjustments to asymmetric shocks are made easier by the adoption of a common currency. D. All of the above are true.

A. Symmetric shocks are not a problem in a currency area, especially if national preferences are homogenous.

When necessary, the EU can obtain additional competences even if these tasks and decisions were not assigned to the EU level. This is allowed by: A. The Flexibility clause B. The Subsidiary principle C. The Conferral principle D. The principle of proportionality

A. The Flexibility clause

The impossible trinity principle states that the following three characteristics cannot be maintained simultaneously: A. a fixed exchange rate, monetary independence and full capital mobility. B. high productivity, free capital movement and monetary independence. C. free trade, free capital movement and low inflation. D. low interest rates, low unemployment and tight monetary policies.

A. a fixed exchange rate, monetary independence and full capital mobility.

The Copenhagen criteria: A. are the rules that define whether Central and Eastern European Countries (CEECs) are eligible to join the European Union. B. define new voting rules to be implemented after the membership of CEECs in 2004. C. define the main steps of the elaboration of the Constitutional Treaty. D. are the rules that define whether CEECs are eligible to join the Euro zone.

A. are the rules that define whether Central and Eastern European Countries (CEECs) are eligible to join the European Union.

In the IS-MP framework, the MP schedule describes __________. A. monetary policy and the financial market equilibrium. B. the equilibrium in the goods market. C. the demand for labour holding prices constant. D. trade-off between inflation and unemployment.

A. monetary policy and the financial market equilibrium.

Explain how Cold War politics accelerated European integration in some ways but hindered it in others (such as geographic expansion of the EU).

After WWII, America and Britain rejected the Soviet vision and this confrontation led to the 'Cold War'. The division ruled European realities for a half century. The merger of the French, US, and UK zones of Germany in 1947-48 was a defining moment in Europe and a precursor of European integration, while the Soviet Union led communism spread in East Europe quite aggressively. Reuniting CEECs with West Europe after the USSR broke up in 1991 was difficult at first, but then 'Europe Agreements' were introduced, which were free trade agreements with promises of deeper integration and some aid. Then, in 1993, the EU set the Copenhagen Criteria for accession of CEECs to the EU: political stability of institutions that guarantee democracy, rule of law, human rights, and respect for and protection of minorities; a functioning market economy capable of dealing with the competitive pressure and market forces within the Union; acceptance of EU law in its entirety and the ability to take on the obligations of membership.

What do we mean by saying that the EMS-1 had become a 'Deutschmark area'? How did that happen?

As capital controls were lifted, realignments became increasingly destabilizing. Thus, high-inflation and depreciation-prone countries tried to reduce inflation to converge to the lowest rate. Germany became the standard to emulate. In other words, German monetary policy became the ERM standard and other countries de facto surrendered monetary policy independence and inflation rates started to converge.

Assuming free capital mobility, which policies (monetary or fiscal policies) are more effective in fixed exchange rate regimes? And which ones are more effective in flexible exchange rate regimes? Explain.

Assuming free capital mobility in a fixed exchange rate regime, fiscal policies are more effective because there is no monetary policy autonomy according to the impossible trinity principle. However, in flexible exchange rate regimes, monetary policy is more effective in increasing GDP since fiscal policy fails to increase GDP.

Using the simplest representation of the logic of the optimum currency areas (see figure above) choose the correct answer from the choices below. (i) The 'marginal cost' curve is upward sloped since a currency gets more useful when more people use it; (ii) the 'marginal cost' curve is upward sloped because it becomes less practical to set a single monetary policy when the area covered gets larger; (iii) The 'marginal benefit' curve is downward sloped since it's easier for the central bank to set monetary policy for a large area where minor regional variations tend to cancel each other out; (iv) The 'marginal benefit' curve is downward sloped since a currency gets more useful when more people use it, but the extra benefit is smaller when the area covered is already large A. (i) and (iii) are true. B. (ii) and (iv) are true. C. (ii) and (iii) are true. D. (i) and (iv) are true.

B. (ii) and (iv) are true.

In which year was the Amsterdam Treaty signed (not entered into force)? A. 1992 B. 1997 C. 1999 D. 2000 E. 2002

B. 1997

T/F: The maximum possible fluctuation of non-dollar currencies vis-à-vis each other under the snake (last part) was: A. 1% B. 2.25% C. 9% D. 15%

B. 2.25%

Which of the following propositions cannot be considered as a benefit of a currency area? A. It reduces transaction costs. B. It reduces the probability of experiencing asymmetric shocks. C. It reduces the exchange rate risk. D. It strengthens the quality of monetary policy.

B. It reduces the probability of experiencing asymmetric shocks.

Which one of the following names is not part of the three-pillars structure that characterized the Maastricht Treaty (pre-Lisbon Treaty): A. Economic Integration B. Monetary Policy C. Justice and Home Affairs D. Common Foreign and Security Policy

B. Monetary Policy

Which of the following statements do not represent ways in which supranationality is enhanced in the EU? A. The Commission can propose new laws that are then voted on by the Council of the EU and the European Parliament. If passed, these new laws bind every Member State, even those that disagree with them. B. The Member States send representatives of their governments to the Council of the EU and heads of states and governments to the European Council that is the highest decision-making power in the EU. C. The Commission has direct executive authority in a number of areas - the most prominent being competition policy. For instance, the Commission can block a merger between two EU companies even if their governments support the merger. D. The rulings of the European Court of Justice can alter laws, rules and practices in Member States, at least in limited areas.

B. The Member States send representatives of their governments to the Council of the EU and heads of states and governments to the European Council that is the highest decision-making power in the EU.

The President of the European Council A. is directly elected by European citizens. B. is elected by qualified-majority voting in the European Council C. is elected for five years. D. can hold a position in a Member state.

B. is elected by qualified-majority voting in the European Council

During the first ten years of the EMS, inflation rates diverged and realignments were chronic. To address this problem, European countries: A. pegged their currency to the DM, the largest member with the lowest rate of inflation. B. set a wide band of fluctuation within which currencies were to be aligned. C. pegged their currencies to the US$. D. abandoned the system and switched to floating rates.

B. set a wide band of fluctuation within which currencies were to be aligned.

In which year was the Single European Act signed (not entered into force)? A. '60s B. '70s C. '80s D. '90s E. 2000s

C. '80s

The euro was formally adopted in __________ , but national bills and coins were replaced only in __________ . A. 1998, 2000 B. 1999, 2000 C. 1999, 2002 D. 2000, 2002 E. 2001, 2002

C. 1999, 2002

The two biggest items in the EU budget are: A. administration and research. B. foreign policy and development assistance. C. Common Agricultural Policy (CAP) and cohesion spending. D. foreign policy and cohesion spending.

C. Common Agricultural Policy (CAP) and cohesion spending.

Which of the following does not represent a basic socio-economic difference of the current Member States of the European Union? A. Differences in population B. Differences in GDP/capita (or GNI/capita) C. Differences in area size of the Member States D. Differences in absolute economic size

C. Differences in area size of the Member States

The EMS agreement established two arrangements, the _________ to which all European Community countries were de facto members and the ________, an optional scheme. A. European Monetary Union (EMU), EMS-2 B. European Monetary System (EMS), Exchange Rate Mechanism (ERM) C. European Currency Unit (ECU), Exchange Rate Mechanism (ERM) D. EMS-2, European Currency Unit (ECU)

C. European Currency Unit (ECU), Exchange Rate Mechanism (ERM)

Which of the following are the main trade-offs in the theory of fiscal federalism? A. Lower costs due to scale versus loss from one-size-fits-all policy, efficiency versus legitimacy, wider versus deeper, subsidiarity versus solidarity. B. Tax rate versus tax base, efficiency versus legitimacy, wider versus deeper, subsidiarity versus solidarity. C. Lower costs due to scale versus loss from one-size-fits-all policy, informational advantage of taking decisions close to voters versus coordination of multi-district spillovers. D. None of the above.

C. Lower costs due to scale versus loss from one-size-fits-all policy, informational advantage of taking decisions close to voters versus coordination of multi-district spillovers.

The path that led to adoption of the euro was set down in the __________. A. Treaty of Rome B. Single European Act C. Maastricht Treaty D. Amsterdam Treaty E. Nice Treaty

C. Maastricht Treaty

In the ordinary legislative procedure, a legislative proposal will go to a special conciliation committee if the Council has amendments to the proposals after the second Parliamentary discussion. Which of the following are not valid as advantages of having a conciliation procedure at this stage of the decision-making process? A. Avoid indefinite back and forth amendments when the Council amends at this stage B. Trying to reach an agreement under pressure on both sides C. The mere existence of the conciliation procedure also sends a clear signal to the Council and the Parliament in the earlier stages of the ordinary legislative process that falling of the proposal is not really an option

C. The mere existence of the conciliation procedure also sends a clear signal to the Council and the Parliament in the earlier stages of the ordinary legislative process that falling of the proposal is not really an option

What proposition about the "passage probability" is false? A. It determines how likely it is that the Council would approve a randomly selected issue. B. It is computed as the ratio of the number of winning coalitions over the total number of potential coalitions. C. With the EU enlargement, it has significantly increased over time. D. It is a useful measure of change in decision-making efficiency.

C. With the EU enlargement, it has significantly increased over time.

Under the Bretton Woods system all currencies were defined in terms of the dollar; exchange rates were __________; and a new institution, the __________, was created and this provided financial support and oversaw national policies. A. pegged to the value of gold, World Bank B. fixed, EMS C. fixed but adjustable, IMF D. aligned, WTO

C. fixed but adjustable, IMF

Within the Eurozone, a country cannot change its exchange rate to re-establish the competitiveness of its exports. Adjustments have to work through: A. inflation and interest rates. B. prices and wages. C. interest rates and budget deficits. D. labour markets and interest rates.

C. interest rates and budget deficits.

External trade policy is an exclusive competency of the EU; this is justified in the theory of fiscal federalism by: A. scale economies B. local preferences and informational advantages C. negative spillovers D. None of the above.

C. negative spillovers

If an investor observes that the nominal interest rate is higher in Country A than in Country B, he should invest in Country A if A. he expects Country A's exchange rate to remain constant over time. B. he expects Country A's exchange rate to appreciate. C. he expects Country A's exchange rate to depreciate. D. A and B are both true.

D. A and B are both true.

Which of the following currencies are currently freely floating? A. US dollar B. Euro C. British pound D. All of the above.

D. All of the above.

The Lisbon Treaty (European Treaty of Reform) was rejected by __________ in __________. A. Finland, 2008 B. France, 2007 C. United Kingdom, 2008 D. Ireland, 2007 E. Spain, 2007

D. Ireland, 2007

When a country's real exchange rate depreciates, A. domestic goods become cheaper than foreign goods. B. domestic competitiveness increases. C. the country will export more and import less. D. all of the above are correct.

D. all of the above are correct.

The Members of the European Parliament are: A. all members of their own national parliaments. B. under instruction of their own party from their home nation. C. appointed by their national governments. D. directly elected by EU citizens and are in office for 5 years.

D. directly elected by EU citizens and are in office for 5 years.

T/F: According to the optimal currency area theory, a common language and religion are key determinants of whether two nations should share a single currency.

False

T/F: An example of an 'asymmetric shock' would be if world demand declined for the exports of all members of a monetary union, but demand rose for the exports of non-members.

False

T/F: Exclusive competence areas are areas where the national or sub-national governments alone decides.

False

T/F: In a fixed exchange rate regime, monetary policy is completely independent of exchange rate policy.

False

T/F: In the Treaty of Rome, EEC members only agreed to set up a Customs Union; the so-called 1992 programme in the Single European Act instituted the principles of free mobility of labour, capital and services.

False

T/F: One of the two main lessons learned from the period of floating exchange rates after collapse of the gold standard were that floating exchange rates cannot be manipulated.

False

T/F: Scale economies is a factor that generally favors placing decision making at the Member State level, while local informational advantages generally favors placing it at the EU level.

False

T/F: The 'Passage Probability' is a measure of the democratic legitimacy of a decision-making process.

False

T/F: The Council of EU is the executive branch of the EU and is a truly supranational body.

False

T/F: The European Commission is the main decision-making body of the EU and it consists of one representative from each EU member that represents the interests of this member.

False

T/F: The Mundell criterion is a political OCA criterion since it recommends fostering the labour market flexibility.

False

T/F: The Purchasing Power Parity principle states that the nominal exchange rate should be constant in the long run.

False

T/F: The Treaty of Rome called only for removal of barriers to trade in goods; the idea of trade in services was established later.

False

T/F: The flexibility clause says that the EU can act only in areas where Member States have conferred power to it in the Treaties.

False

T/F: The principle of proportionality means that when an EU action is necessary it should be undertaken with the maximum necessary actions.

False

T/F: Under Hume's price-specie mechanism, a nation which purchases more imports than exports tends to accumulate gold.

False

Think about the trade-offs stressed by the theory of fiscal federalism. Discuss how the trade-off between negative spillovers and diversity can explain the fact that external trade policy is an exclusive competency of the EU while, on the other hand, the EU itself has adopted only very limited harmonization of social policies.

Negative spillovers or externalities occur when one region's policy has a negative effect on other regions. This reasoning explains the fact that external trade policy is an exclusive competency of the EU, as it wouldn't make sense for individual regions to each have their own laws governing external trade. If this were the case, each region might have an incentive to implement aggressive trade policies that would increase competition for external trade partners with their neighbors, leading to a highly fragmented market with too many small firms and a "race to the bottom" between each region. On the other hand, the EU has adopted only very limited harmonization of social policies because of the advantages of diversity and local information. One size fits all policies tend to be inefficient since they become too much for some and too little for others. Although the EU could set different local policies, lower levels of government are likely to have high information advantages. This reasoning is highly applicable in the area of social policy, so decisions in this sector are better taken at the national, regional, or local level.

Explain why it is important for the coherence of the Single Market that the EU Court's rulings cannot be appealed in Member States' courts.

The EU Court is the highest authority on the application of EU law. The Court reacted to the lack of specificity outlined in the Treaty of Rome by creating the community's legal system via what is known as 'case law', where the Court uses its written decisions on a particular dispute to establish general principles of the EU legal system. These court rulings can establish legal precedents that create new laws and redefine existing laws by reinterpreting them. The first main principle that derives from this foundation of EU law is the direct effect, where EU law can create rights which EU citizens can rely upon when they go before their domestic courts. Since all EU member states' courts must abide by all EU laws, the coherence if a Single Market is more guaranteed; if this weren't the case and member states' courts could pick and choose the EU laws they wanted to implement, the EU would fall into shambles. Second there is primacy, where EU community law has the final say (e.g., highest French court can be overruled) so that it cannot be altered by national, regional or local laws in any member state. In other words, when EU law and national, regional, or local laws conflict, the EU law must be enforced. Third, there is autonomy, where the EU legal system is completely independent of member states' legal systems.

List the main sources of EU revenue and the main spending priorities. Explain how each of these has developed over time.

The main sources of EU revenue are tariff revenues, agricultural levies (tariffs on agricultural goods), VAT income, and taxes paid by members based on GNP. The main spending priorities are the common agricultural policy (CAP, around 40%) and cohesion policies (around 35%). As the cost of CAP started to rise rapidly in the 1960s and spending on cohesion started to rise in the 1980s, spending in these two sectors increased and the EU budget grew steadily as a fraction of EU GDP (from 0.8% to 1.2% in 1993). Since the mid-1960s, CAP spending began to dominate the budget; at its peak in 1970, it made up 92% of the budget. However, from the date of the first enlargement in 1973, cohesion spending began to grow and push down CAP spending, so that spending for both of these sectors ranged between 80-85% of the budget. In the past three decades, cohesion spending has steadily crowded out CAP spending.

T/F: A currency becomes more useful as it is used in a wider economic area - but having a one-size- fits-all monetary policy typically becomes more problematic in a wider economic area; this is the key trade off in optimum currency area theory.

True

T/F: All new EU Treaties must be ratified by each Member State according to its own constitutional provisions.

True

T/F: Britain's application to the EEC triggered a domino effect in that Ireland, Denmark and Norway applied soon afterwards.

True

T/F: Fiscal federalism is a framework that is useful for thinking about the various trade-offs faced when allocating different types of decisions to the EU versus the Member States.

True

T/F: For a given group of voters each with a given number of votes, raising the majority threshold from 50 per cent to, say, 72 per cent can never increase the group's decision making efficiency.

True

T/F: If two countries share a common currency but face an asymmetric shock, the union's common exchange rate may automatically adjust to be correct on average but individually both countries are in disequilibrium.

True

T/F: If workers are highly mobile between two nations, those nations are more likely to form an optimal currency area.

True

T/F: Optimum currency area theory can be used to think about whether it is good for a country to join the euro.

True

T/F: Subsidiarity principle states that decisions should be taken as close to the people as possible.

True

T/F: The 1978 EMS agreement was explicitly symmetric, without any central currency.

True

T/F: The European Council is comprised of the EU's national leaders and as such is the highest political-level body in the EU. It provides political guidance to the EU as a whole, but especially to the European Commission. All EU major strategic choices are made by the European Council, sometimes in cooperation with the European Parliament.

True

T/F: The Lisbon Treaty removed the 3 pillars structure of the European Union.

True

T/F: The Normalized Banzhaf Index (NBI) determines how likely it is that a nation finds itself in a position to "break" a winning coalition on a randomly selected issue. The questions of who sets the voting agenda, how coalitions are formed and how intensively each country holds its various positions are not considered.

True

T/F: The Organization for European Economic Cooperation (OEEC) was set up to distribute Marshall Plan aid.

True

T/F: The Purchasing Power Parity principle states that the real exchange rate should be constant in the long run.

True

T/F: The principle of subsidiarity is the principle enshrined in the treaty whereby any legislation should be decided on the lowest possible level of governance, closest to the citizens of the European Union. Thus, the principle means that the powers should only be transferred from the local or national level to the European Union level if there this is advantageous or can be considered to provide some net benefits.

True

T/F: Under a monetary union, the exchange rate is no longer established by domestic authorities.

True

T/F: Until the end of the nineteenth century, money was metallic and a large number of currencies circulated side by side.

True

Using the IS-MP-IRP framework, examine the effects of an expansionary fiscal policy (e.g. an increase in public spending, G) under a fixed exchange rate regime.

Under a fixed exchange rate regime, an expansionary fiscal policy will result in a higher GDP. As the interest rate rises, capital starts flowing in and causes international investors to buy the domestic currency and this means that the more abundant financial resources push the interest rate down (point C). However, in the end, the GDP still increases.

Using the IS-MP-IRP framework, examine the effects of an expansionary monetary policy under a fixed exchange rate regime.

Under a fixed exchange rate regime, an expansionary monetary policy will not be effective since the central bank is already committed to the exchange rate peg.

Using the IS-MP-IRP framework, examine the effects of an expansionary fiscal policy (e.g. an increase in public spending, G) under a flexible exchange rate regime.

Under a flexible exchange rate regime, an expansionary fiscal policy will not increase the GDP since the continuing exchange rate appreciation increasingly hurts exporters and draws in imports to the detriment of local producers (point A).

Using the IS-MP-IRP framework, examine the effects of an expansionary monetary policy under a flexible exchange rate regime.

Under a flexible exchange rate regime, an expansionary monetary policy becomes exchange rate policy and is effective. The exchange rate depreciates, boosting exports and reducing imports, and thus increases GDP.

During the inter-war era, misalignments led to competitive devaluations, which then prompted a tariff war. Explain why.

When gold standard collapsed, exchange rates were left to float. Each country (except Germany, because of capital controls) sought relief by letting its exchange rate depreciate to boost exports. Tit-for-tat depreciations, which led to protectionist measures, resulted in political instability, leading to war.

Consider the case where i > i* + dep. Explain the capital flows triggered by this configuration and in which direction they are likely to push the current exchange rate E, for a given expected future exchange rate?

When the domestic interest rate is higher than the foreign interest rate + depreciation, the domestic interest rate is too high for the international financial markets to be in equilibrium (point A at the intersection between the IS and MP curves is higher than the interest rate parity line). High returns on domestic currency assets attract capital inflows, and investors buy up the domestic currency, which tends to appreciate the current exchange rate E in the future. The central bank can intervene by accumulating the foreign currency.

In the aftermath of the financial crisis, the exchange rates of Poland, Sweden, and the UK have depreciated sharply (by some 20 per cent or more) relative to the euro. These countries are members of the Single Market but not of the monetary union. Discuss the likely effects on these countries and on the Eurozone countries.

With the financial crisis, the exchange rates of Poland, Sweden, and the UK depreciated sharply. This made imported goods significantly more expensive and redirected spending towards domestic production. This contributed to an even higher increase in the price of imports and contributed to a rise in inflation. In Eurozone countries, capital inflows increased dramatically and the Euro appreciated.

If the nominal exchange rate appreciates by less than the excess of foreign over domestic inflation, is the real exchange rate appreciating or depreciating?

**REVISE**

In which year was the Treaty of Rome signed (not entered into force)? A. 1957 B. 1962 C. 1963 D. 1967 E. 1969

A. 1957

Which of the following are not sources of the financing of EU's budget: A. Tax on financial transactions B. Share of agricultural levies C. Share of Common External Tariff D. Share of VAT income E. Share of Member State GNI

A. Tax on financial transactions

Consider the simple labour market depicted in the diagram. Which of the following is true? A. The difference between L and L'' represents the level of involuntary unemployment if wages are rigid and equal to w'. B. A perfectly free and competitive labour market would set the real wage to w' and the employment level to L. C. If the real wage ends up as w in this market, the difference between L' and L shows the level of unemployment. D. A perfectly free and competitive labour market would set the real wage to w and the employment level to L'. The supply of labour is upward slope since firms are willing to pay higher wages for more skilled workers.

A. The difference between L and L'' represents the level of involuntary unemployment if wages are rigid and equal to w'.

Which one of the following statements is false? A. The marginal productivity of labour is upward sloped since labour productivity increases as more hours are being performed. B. The marginal productivity of labour curve represents the demand of labour. C. The marginal productivity of labour is downward sloped since the amount of other factors of production being used is fixed.

A. The marginal productivity of labour is upward sloped since labour productivity increases as more hours are being performed.

The joint rescue operation decided in Europe in May 2010 was called A. Troika B. EFSF C. PSI D. Stress-test

A. Troika

The ECB is run by the Governing Council which is made up of: A. an Executive Board of six members, appointed by the heads of states or governments of the countries which have joined the monetary union. B. the governors of the national central banks of EU members in the Eurozone. C. the President of the EU, and two representatives of the EU Parliament. D. A. and B.

A. an Executive Board of six members, appointed by the heads of states or governments of the countries which have joined the monetary union.

European banks have tended to merge with other banks in the same nation, rather than merging across international lines. Nevertheless: A. competition can rise since banks have the right to make intra-EU loans and the introduction of the euro has made this less risky. B. financial markets are replacing banks as a source of loans for companies. C. the result has been a big increase in collusion among banks. D. None of the above.

A. competition can rise since banks have the right to make intra-EU loans and the introduction of the euro has made this less risky.

The Stability and Growth Pact serves two main useful purposes: it counteracts the __________ and it greatly reduces the odds of a __________ . A. deficit bias, debt default B. big government bias, exchange rate crisis C. Maastricht Treaty, Parliamentary censure D. power of the ECB, euro default

A. deficit bias, debt default

In the standard (Solow) growth model presented in Ch.7 (on growth effects and factor market integration), European integration may positively affect growth: A. directly due to the increasing capital formation, and then some more, due to the induced efficiency gain B. due to the efficiency gain C. due to the increasing capital formation. D. directly due to the efficiency gain, and then some more, due to the induced capital formation.

A. directly due to the increasing capital formation, and then some more, due to the induced efficiency gain

According to the theory of __________ , the existence of fiscal policy externalities (spillovers) suggests that the EU should undertake some collective discipline of budget deficits. A. fiscal federalism B. optimal currency area C. customs unions D. monetary neutrality

A. fiscal federalism

Within the Eurozone, when one country runs a balance of payments surplus, it receives __________ of euros. A deficit country can no longer use __________ to re-establish competitiveness. A. inflows, the exchange rate B. inflows, trade barriers C. outflow, the capital account D. outflow, wage adjustments

A. inflows, the exchange rate

Investors may view the euro area with suspicion because one of its member's public debt increases dramatically. The result would be sizeable capital __________ and euro __________ . A. outflows, depreciation B. outflows, appreciation C. inflows, depreciation D. inflows, abandonment

A. outflows, depreciation

If the real wage ends up being higher than the market-clearing level, then: A. some people will be unemployed, but the ones who find jobs are happy that their wage is higher. B. firms will not have an incentive to invest in productivity enhancing technology. C. domestic firms cannot be competitive with foreign firms. D. the unemployment rate will rise continuously.

A. some people will be unemployed, but the ones who find jobs are happy that their wage is higher.

The European System of Central Banks (ESCB) is composed of: A. the European Central Bank (ECB) and the national central banks of all EU Member States. B. all the organizations mentioned in a. plus the Bank for International Settlements. C. all the organizations mentioned in b. plus the IMF. D. the European Central Bank (ECB) and the national Central banks of monetary union Member States.

A. the European Central Bank (ECB) and the national central banks of all EU Member States.

Large financial institutions are called 'systemic' because A. their failure can drag the whole financial system and the economy into a crisis. B. they all act the same way so if one decide not to lend to a country, all the others will do the same. C. they act suddenly such that it is not possible to predict their behavior in the short-run. D. All of the above.

A. their failure can drag the whole financial system and the economy into a crisis.

In principle, central banks may operate as lenders of last resort because A. they must borrow to acquire emergency funds. B. they can instantly create as much money as needed for emergency interventions. C. they must borrow to intervene to help countries. D. national governments must intervene to help other countries.

A. they must borrow to acquire emergency funds.

Using the simplest representation of the logic of the optimum currency areas (see figure above), the intersection of the two curves (marginal benefit and marginal cost of an OCA) identifies the optimum currency area size since: A. this is where the marginal cost of enlarging the area just equals the marginal benefit, so this is the size where the total benefit is maximized. B. this is where the political gains from integration equal the economic costs of a single currency. C. this is where the political costs and benefits just offset each other, so the political cost of the monetary union is equal to zero. D. All of the above.

A. this is where the marginal cost of enlarging the area just equals the marginal benefit, so this is the size where the total benefit is maximized.

Explain what happens to a firm's profits as it moves in Figure 8.3 from point A to point B.

At point A, the cost of labor is lower than the marginal productivity of labor, so it is profitable for the firm to hire more. At point B, the the cost of labor is higher than the marginal productivity of labor, so it would be beneficial for the firm to reduce the amount of labor hired. The best position is point C on the marginal productivity of labor curve, as here the firm hires the number of hours that is equal to the marginal productivity of labor.

What are the automatic stabilizers?

Automatic stabilizers are a type of fiscal policy that is spontaneously countercyclical. Tax receipts decline and welfare spending rises when the economy slows down.

In which year was the Nice Treaty signed (not entered into force)? A. 1992 B. 1997 C. 1999 D. 2000 E. 2002

D. 2000

Referring to the following list, the 'Convergence Criteria' for joining the monetary union - by Baldwin and Wyplosz also called the coronation theory - included: (i) a country's inflation rate should not exceed by more than 1.5 percentage points the average of the three lowest inflation rates achieved by the European Union member countries, and that its long-term interest rate should not exceed the average rates observed in the three lowest inflation rate countries by more than 2 percentage points. (ii) the country must have taken part in the ERM for at least two years without having had to devalue its currency, its public debt should not exceed 60 per cent of its GDP or be moving in that direction, and its government deficit should be less than 3 per cent. (iii) the country's GDP growth rate should be at less than 50 per cent of the average of the three fastest growing EU members. A. (i) only B. (i) and (ii) C. (iii) only D. (i), (ii) and (iii)

B. (i) and (ii)

Only one of the following reasons for involuntary employment is true. Which one is it? A. Free movement of labour. B. Collective negotiations. C. Excess demand of labour. D. Low unemployment benefits.

B. Collective negotiations.

If a country experiences a negative productivity shock that makes the labour demand curve shift to the left, which of the following statement is true? A. In the absence of wage rigidities, the equilibrium wage will increase. B. In the absence of wage rigidities, the equilibrium wage will decrease. C. With wage rigidities, the equilibrium wage will increase. D. With wage rigidities, the equilibrium wage will decrease.

B. In the absence of wage rigidities, the equilibrium wage will decrease.

The logic behind the expected positive effect of European integration on medium-term growth should lead to observe the following 'footprints' after accessions, except: A. Stock market prices should increase. B. Interest rates should fall C. The aggregate investment to GDP ratio should rise. D. The (net) foreign direct investment figures should improve.

B. Interest rates should fall

In May 2010, the European Council decided a joint rescue operation to support Greece. Which of the following institutions was not involved in this operation? A. IMF B. WTO C. European Union D. ECB

B. WTO

During the period 2000-2007 (that is, before the Global Financial Crisis), housing prices in the US A. kept decreasing B. kept rising C. were constant D. rose and fell alternatively

B. kept rising

In the standard (Solow) growth model presented in Ch.7 (on growth effects and factor market integration): A. all long run growth is driven by physical capital accumulation. B. medium run growth is affected by physical capital accumulation, but long-run growth is determined by technological progress. C. investment is assumed to be financed by borrowing abroad. D. the main equilibrating variable is inflation.

B. medium run growth is affected by physical capital accumulation, but long-run growth is determined by technological progress.

The ECB is quite independent in two senses: it can define its __________ and it can decide how to conduct __________ . A. President, public relations B. objectives, monetary policy C. President, monetary policy D. Board of Governors, voting in the Council

B. objectives, monetary policy

The supply curve for labour is upward sloped since: A. large firms which hire many workers are able to force down the real wage. B. people require a higher real wage in order to work more. C. the number of people who take early retirement is lower when real wages are high. D. None of the above.

B. people require a higher real wage in order to work more.

When thinking about coordination of fiscal policy in the Eurozone, one must distinguish between two aspects of fiscal policy. The first aspect is __________ and concerns the size of the budget and how are taxes raised, etc. The second aspect is __________ and concerns the role of the deficit in stabilization policy. A. regional, national B. structural, macroeconomic C. political, sociological D. precise, less precise

B. structural, macroeconomic

When a country's real exchange rate appreciates, A. the economy becomes more competitive B. the current account will deteriorate C. the country will export more D. the country will import less

B. the current account will deteriorate

In the IS-MP framework, the IS schedule describes __________. A. the equilibrium in the money market for a given real money supply B. the equilibrium in the goods market C. the supply of labour holding constant the degree of competition D. the Inflation-Savings trade-off

B. the equilibrium in the goods market

List the 15 nations that were members of the European Union in 2003.

Belgium, France, Germany, Italy, Luxembourg, Denmark, Ireland, Greece, Portugal, Spain, Austria, Finland, Sweden, UK, Iceland

Describe the phenomenon of information asymmetry? How can it explain why banks refuse credit to some customers?

Borrowers have incentives to hide risks, and lenders are aware and may overprice risk/refuse to lend. There is an inherent danger of adverse selection and moral hazard, which implies a need of careful regulation of financial markets.

The Balassa-Samuelson principle predicts that: A. Inflation will always exceed the 2 per cent level chosen by the ECB. B. Inflation will be higher in richer countries. C. Inflation will be higher in poorer countries. D. Inflation rates must be the same throughout the euro area.

C. Inflation will be higher in poorer countries.

Which kind of investment is not expected to be characterized by 'diminishing returns': A. Investment in physical and knowledge capital. B. Investment in physical capital C. Investment in knowledge capital. D. None of the above.

C. Investment in knowledge capital.

Which of following elements did not make markets start worry about the Greek debt? A. increasing levels of public debt (including the discovery of past hidden debt). B. the deterioration of public finances. C. a house market bubble in Greece. D. the threat that if all market participants worry, the Greek government could have to pay higher interest rate making the cost of serving the debt increase.

C. a house market bubble in Greece.

In the absence of wage rigidities, if a country experiences a positive demand shock, A. unemployment increases. B. wage decreases. C. firms increase their labour demand for any level of wages. D. employment decreases.

C. firms increase their labour demand for any level of wages.

The Taylor rule states that the following variables affect the interest rate position: i) the deviation of inflation from its (implicit or explicit) target ii) the money growth iii) the output gap, which is the difference between actual and potential GDP, measured as a percentage of potential GDP iv) the velocity of money A. i) and ii) B. i), iii) and iv) C. i) and iii) D. ii) and iv)

C. i) and iii)

The Purchasing Power Parity principle asserts that: A. the rate of appreciation of a currency follows the increase of foreign interest rates. B. there is no visible link between volatile exchange rates and money growth and inflation. C. over the long run the nominal exchange rate and prices all adjust to each other so that external equilibrium is restored. D. prices are volatile while nominal exchange rates are much more stable.

C. over the long run the nominal exchange rate and prices all adjust to each other so that external equilibrium is restored.

Subprime loans were disseminated throughout the banking system through the process of A. diversification B. dissemination C. securization D. deregulation

C. securization

Trade increases among two countries can take two forms: each country becomes more specialized and therefore exports and imports different goods (e.g. France sells wine and Germany sells beer), or both countries compete more directly on similar goods (e.g. France and Germany sell cars to each other). How do these alternatives affect the OCA criteria?

Countries whose production and exports are widely diversified and of similar structure form an optimum currency area. Countries that produce a wide range of products and engage in various forms of trade will be less affected by shocks that concern any particular good because that good weighs relatively little in total production.

Referring to the following list, identify the three classic economic criteria for an optimal currency: (i) a highly mobile labour force within the area; (ii) a common language; (iii) geographic closeness; (iv) well diversified and highly similar production and export structures; (v) highly open nations that trade a lot with each other; (vi) highly integrated capital markets A. (i), (ii) and (iii). B. (i), (ii) and (iv). C. (ii), (v) and (vi). D. (i), (iv) and (v).

D. (i), (iv) and (v).

Referring to the following list, identify the three political criteria for an optimal currency: (i) voters who are even split between centre right and centre left coalitions; (ii) a strong and shared belief in subsidiarity; (iii) common preferences concerning how the central bank should view the trade-off between inflation and unemployment when dealing with shocks; (iv) similar political structures in terms of the role of the Parliament versus the Government in decision making; (v) a well functioning system for transferring resources from one member of the currency union to the other in the event of asymmetric shocks; (vi) a shared belief that the short-term cost of a common currency will be compensated for by the longer term benefits of deeper integration in the name of a common destiny A. (i), (ii) and (iii). B. (i), (iii) and (iv). C. (ii), (iv) and (vi). D. (iii), (v) and (vi).

D. (iii), (v) and (vi).

The Stability and Growth Pact considers that deficits are excessive when they are above __________ per cent of GDP. In order to leave room for the automatic stabilizers to play their role, the pact also stipulates that participants in the monetary union which commit themselves to a medium-term budgetary stance are __________ . A. 10, in balance B. 5, in surplus C. 1, balanced or in surplus D. 3, balanced or in surplus

D. 3, balanced or in surplus

The target interest rate for the ECB is the European Over Night Index Average (EONIA), a weighted average of overnight lending transactions in the euro area's interbank market. The ECB controls this by: A. requiring Eurozone banks to charge the prime clients an interest rate that is no more than plus or minus 0.5 per cent from the target interest rate. B. establishing an 'interest rate ceiling' by offering to lend euros to banks at a fixed rate, and establishing a 'interest rate floor' by offering to borrow euros from banks at a fixed rate that is somewhat lower than the interest rate ceiling. C. conducting weekly auctions for reserve deposits that provide liquidity to the banking system. D. B and C E. A and C

D. B and C

Heavy public borrowing by one country is a sign of fiscal indiscipline that could spell trouble; if __________ came to believe that one country's __________ is unsustainable, they might view the whole euro area with suspicion. A. labour unions, debt. B. markets, price controls. C. the European Parliament, laws. D. markets, debt.

D. markets, debt.

In the aftermath of the Global Financial Crisis, bailing out banks in the Eurozone and implementing large expansionary policies contributed to increase _________ and to raise concerns of _________ A. asymmetry information problems; public budget B. uncertainty; vulnerability to systemic shocks C. asymmetry information problems; banking crises D. public deficit; unsustainable public debts.

D. public deficit; unsustainable public debts.

The demand curve for labour is a downward sloped curve since: A. large firms which hire many workers are able to force down the real wage. B. people require a higher real wage in order to work more. C. the number of people who take early retirement is lower when real wages are high. D. the amount of other factors of production being used (e.g. equipment available) is fixed

D. the amount of other factors of production being used (e.g. equipment available) is fixed

In which year was the Maastricht Treaty signed (not entered into force)? A. 1982 B. 1986 C. 1987 D. 1989 E. 1992

E. 1992

In which year was the Lisbon Treaty signed (not entered into force)? A. 2003 B. 2004 C. 2005 D. 2006 E. 2007

E. 2007

Schematically describe the logic behind the expected positive effect of European integration on medium-term growth.

European integration improves the European economy by encouraging a more efficient allocation of European resources. This boosts investment and thus means more tools per worker, raising output per worker faster than if there were no integration. Integration thus produces extra growth as the capital/labor ratio approaches its new equilibrium output in the medium term.

What are externalities or spillovers? How do they operate in the case of fiscal policy?

Externalities or spillovers lead to inefficient outcomes when each country is free to act as it wishes. National fiscal policies of one country affect others, and when these externalities/spillovers are significant, fiscal policy coordination can help.

T/F: 'Induced capital formation' (that is extra investment induced by efficiency gain) explains how the EU's long-run growth rate could be affected by European integration.

False

T/F: At the beginning of the crisis, when the US housing market tumbled, private banks kept assuring their mutual lending and thus easily find at least the cash they needed for routine daily operations.

False

T/F: Country bailouts are explicitly allowed by European Treaties.

False

T/F: Fiscal policy in Euro-area is directly decided at the EU level.

False

T/F: Monetary policy can be easily replaced by fiscal policy for stabilization purposes.

False

T/F: The Maastricht Treaty specifies that the ECB's prime goal is to maintain price stability and the ECB clarified this by saying it means to keep inflation in the range of 3 per cent to 1 per cent over a 5 year horizon.

False

T/F: The amount that one Euroland nation borrows has no effect on the borrowing cost that other Euroland nations face.

False

T/F: The simplified Solow model in the diagram (see picture below) assumes 'increasing returns' of capital investment.

False

T/F: The strategy of the European Central Bank gives priority to money targeting instead of inflation targeting.

False

Briefly describe the three 'political' criteria of the Optimum Currency Area (OCA) theory.

First, fiscal transfers: are there insurance mechanisms that mitigate, or even eliminate, the consequences of unexpected shocks? Second, homogeneous preferences: it is important that countries can promptly agree on policy responses in the presence of unexpected shocks. Third, degree of solidarity: when one country suffers from a serious shock and cannot respond with an exchange rate change, it is often in the collective interest for the other members to rescue it in various ways.

Briefly describe the three 'economic' criteria of the Optimum Currency Area (OCA) theory.

First, labor mobility (Mundell): since prices and wages are sticky, one solution is for production facilities to move from the country that faces an adverse shock to the unaffected countries. Second, production diversification (Kenen): strong asymmetric shocks are bound to be rare if all countries produce a wide and similar range of goods. Third, openness (McKinnon): goods prices in countries that are very open to trade cannot be rigid.

Explain why banks and governments can be caught in a situation where they weaken each other.

Governments and banks are strongly tied together. Banks hold bonds issued by their governments because, traditionally, these bonds are considered safe. An implication here, however, is that banks will suffer large losses if a government defaults on its debt obligations. At the same time, governments must rescue banks in difficulty, and then the debts of the banks become the debts of the government. This interdependence is called the doom loop.

Why do central banks have to anticipate future economic developments?

It is important for central banks to anticipate future economic developments like growth, employment, prices, exchange rates, foreign conditions, etc. to choose appropriate monetary policies, ie. expansionary or contractionary.

Under the 'quality majority voting' (QMV) governing Council voting, is the voting power of large countries more or less than population proportionality would suggest? MORE or LESS

LESS

Which characteristics of the labour markets can explain the existence of involuntary unemployment (and the fact that wages do not respond immediately to the existence of involuntary unemployment)?

Labor market characteristics that can explain the existence of involuntary employment are: - collectively negotiated salaries - agreements that hold for long periods (implying that labor markets react slowly to changing conditions) - regulated wage contracts - regulated conditions for hiring and firing - unemployment benefits.

What does it mean 'maturity transformation' in the banking industry?

Maturity transformation refers to matching lending and borrowing needs. In a nutshell, it is the practice by financial institutions of borrowing short term and lending long term.

What is the difference between regulation and supervision?

Regulation is the adoption of good rules, and supervision ensures that they are respected. Core principles of regulation were agreed upon within the Basel Committee for Bank Supervision, and within the Eurozone, the European System of Financial Supervision, composed of 5 organs, is the financial institution and market supervisory body.

The new Member States are likely to be affected by the Balassa-Samuelson effect. What does this imply for their inflation rates once they join the Eurozone?

The Balassa-Samuelson effect says that equilibrium real exchange rates of developing countries follow an appreciating trend. Therefore, this would imply that their inflation rates might increase once they join the Eurozone.

Why can't the Eurosystem take responsibility for national inflation rates?

The Eurozone comprises many countries so divergences of economic situations are likely. Therefore, the Eurosystem cannot take asymmetries into account and look at each individual country, but at the Eurozone as a whole. In principle, within the Governing Council, NCB governors are not supposed to discuss their own countries. With low inflation as its primary objective, the Eurosystem cannot have one policy that fits all.

Which was the main goal of the Single European Act (SEA)? Summarize the key changes implemented by the Single Market Act.

The Single European Act (SEA, 1987) aimed to create 'an area without internal frontiers in which the free movement of goods, persons, services, and capital is ensured' (i.e., the four freedoms already promised by the Treaty of Rome). It also implemented important institutional changes such as majority voting instead of unanimity on issues related to the Single European Market. This change in voting procedures unleashed a massive wave of technical barriers to trade (TBT) liberalization and gave a big boost to further trade integration. Another main goal was a new focus on capital mobility.

Why did bank deregulation created the conditions for a financial crisis?

The bank deregulation phase that started in the 1980s was followed by a rapid expansion of financial sectors in the USA and Europe. Banks became active investors, leading to higher levels of maturity and currency mismatch. Banks took major risks and engaged in moral hazard, encouraged by the implicit support of their governments. Banks began allocating subprime mortgages to risky people in the US, relying on ever increasing housing prices. These loans were sold to banks, which in turn sold them to other banks through the process of securitization. Then, when housing prices started to decrease, the situation was unstable and the levels of distrust between banks increased, so inter-bank lending stopped and the financial crisis ensued.

What is the cyclically-adjusted balance?

The cyclically adjusted budget shows what the balance would be if the output gap is zero in a given year.

What is the difference between the actual and cyclically adjusted budgets? Why are discretionary actions only visible in changes of the cyclically adjusted budget balance?

The difference between the actual and cyclically adjusted budget is automatic stabilizers. Discretionary actions are only visible in changes of the cyclically adjusted budget balance because these are voluntary decisions to change tax rates or spending, and because of automatic stabilizers, actual budget figures do not reveal what governments do with fiscal policy.

T/F: Self-fulfilling prophecies mean that if the market worry about a crisis, the crisis is likely to happen.

True

What is the intended purpose of the Stability and Growth Pact?

The main purpose of the Stability and Growth Pact, adopted in 1997, is to avoid excessive deficits with fines for countries not respecting it. The SGP considers that deficits are excessive when they exceed 3% of GDP and public debt when it exceeds 60% of GDP. It also has a preventive arm, corrective arm, procedures to embed member countries' budget process within a European framework, and sanctions.

What are the five convergence criteria and what is the logic behind each of them?

The main purpose of the five entry conditions to the European Monetary Union is to certify which countries have adopted a "culture of price stability." - The first convergence criteria is inflation, not to exceed by more than 1.5 percentage points the average of the 3 lowest inflation rates among EU countries. - The second is that the long-term nominal interest rate must not exceed by more than 2 percentage points the average of the 3 lowest inflation rates among EU countries. - The third is 2 year membership in the ERM without having been forced to devalue. - The fourth is that the budget deficit must be less than 3% of the GDP. - The fifth and last is that public debt must be less than 60% of GDP.

What are the main spillovers through which one country's fiscal policy actions can help or hurt other countries?

The main spillovers are cyclical income, (through trade, ie. import-export), borrowing costs (higher interest rates or euro appreciation), financial distress, and deficit bias.

Explain the no-bailout clause included in the Maastricht Treaty.

The mere threat of one Eurozone member country's national central bank default would so concern all other member governments that they would feel obliged to bail out the nearly bankrupt government. However, the Maastricht Treaty included a "no-bailout" clause in Article 125 to prevent this.

List the main trade-offs stressed by the theory of fiscal federalism.

The optimal allocation of tasks under the theory of fiscal federalism depends on the following main trade-offs. - First, there are diversity and local informational advantages. People have different preferences which result in inefficiencies from centralized decisions, so this is a factor that leans towards decentralization. - Second, there are scale economies, which induce higher cost savings with centralization, so this is a factor that argues for centralization. - Third, there are positive and negative spillover effects which are positive and negative externalities of local decisions, which tends towards centralization or at least cooperation. - Fourth, there is democracy, which is a control mechanism that favors decentralization. - Fifth and last, there is jurisdictional competition that favors decentralization, since the "exit" option is a method to influence governments.

List the possible reasons why the sovereign debt crisis (and contagion) has been limited to the Eurozone and to only a number of European countries within the Eurozone.

The possible reasons why the sovereign debt crisis and contagion were limited to select countries within the Eurozone are indebtedness, no lender of last resort, competitiveness issues, and policy mistakes. Public indebtedness was not a sufficient reason alone.

Why are central banks ultimately responsible for inflation? How can they achieve the objective of price stability?

The primary objective of the ESCB is to maintain price stability, and their actions in this area of monetary policy make them ultimately responsible for inflation. The strategy to achieve this objective relies on the definition of price stability as a "change in HICP of below but close to 2%" and two pillars to identify risks to price stability, the first being "economic analysis" looking at the short to medium term and the second being "monetary analysis" looking at the medium to long term.

In many European nations, the trend for the past couple of decades has been to decentralize decision making from the national level to the provincial or regional level. How could you explain this trend in terms of the theory of fiscal federalism?

The task allocation principle of subsidiarity under the theory of fiscal federalism helps explain the devolvement of decision making to lower levels of government. The idea of subsidiarity states that it's important to keep decisions as close to the citizens as possible without jeopardizing win-win cooperation at the EU level. In other words, EU action is required only if it is more effective than action at the national, regional, or local level. In many cases, often due to the fiscal federalism trade-offs of diversity and local information advantages, democracy as a control mechanism, and jurisdictional competition favor a decentralized allocation of tasks at the regional or local level. When in doubt, it is usually best to allocate the task to the lowest practicable level of government since higher-level decisions are less subject to democratic control via voice and exit.

In July 2012, the ECB president Mario Draghi announced that 'the ECB is ready to do whatever it takes to preserve the euro'. Why has it been so successful as a policy response to the sovereign debt crisis (together with the consequent Open Market Transactions programme)?

This announcement was understood as a promise to buy as many crisis countries' public bonds as necessary to bring down the interest rates. The Open Market Transactions programme formalized this decision, and was a drastic step as it could be construed as financing deficits. However, the effect was both immediate and long-lasting. Although the ECB did not actually make any purchases under the OMT programme, the interest rates still declined quite dramatically.

What is the rationale of the Taylor rule?

This rule posits that the central bank chooses the actual interest rate as a function of firstly the deviation of inflation from its (implicit or explicit) target, and secondly the output gap, which is the difference between actual and potential GDP measured as a percentage of potential GDP.

T/F: Since the industrial revolution, growth in Europe has averaged about 2 per cent per annum except during the 'golden age' of growth in the 1950-1973 period.

True

Why are transparency and accountability so important for the Eurosystem? What kind of difficulties can you envision if the system is perceived as not sufficiently accountable and transparent?

Transparency is important because by revealing the contents of its deliberations, a central bank conveys the rationale behind and the difficulties faced by its decisions to the public. Accountability is important because delegation to a body of unelected officials like the board members of the ECB must be counterbalanced by democratic accountability. If the system weren't sufficiently transparent and accountable, unelected officials could potentially abuse their power and the public, ie. the media, financial markets, and independent observers, wouldn't have access to information and be able to critique the actions of the ECB.

T/F: 'Induced capital formation' (that is extra investment induced by efficiency gain) explains how the EU's medium-run growth rate could be affected by European integration.

True

T/F: A good deal of stabilization using fiscal policy comes automatically; as incomes fall in a recession, fewer taxes are collected, and yet government expenditures rise due to increased social payments such as unemployment insurance.

True

T/F: A primary function of the financial services industry is to channel the economy's savings into good investments.

True

T/F: Adoption of the euro means a nation loses its ability to control its monetary policy at the national level.

True

T/F: Asymmetric information is unavoidable and it tends to undermine the development of financial institutions and markets; this is one of the main reasons why financial transactions are heavily regulated in almost all nations.

True

T/F: Banks are financial institutions that receive deposits from individuals and firms and then make loans to individuals and firms.

True

T/F: During the Global Financial Crisis, house price bubbles occurred not only in the United States but also in Europe, especially in Ireland, Spain and UK.

True

T/F: ECB is required to sent an annual report to the Parliament.

True

T/F: In order to enter the monetary union, the new EU members must satisfy the same criteria that the older members did.

True

T/F: The Balassa-Samuelson effect can be stated as follows: Equilibrium real exchange rates of countries that enjoy lasting fast growth - because they are catching up from a lower level of development - follow an appreciating trend.

True

T/F: The Bretton Woods System retained gold as the ultimate source of value but the only currency directly tied to gold was the US dollar.

True

T/F: The EEC was established by the Treaty of Rome.

True

T/F: The European Central Bank is one of the most politically independent central banks in the world.

True

T/F: The European Coal and Steel Community (ECSC) consisted of the same 6 nations that later formed the European Economic Community.

True

T/F: The European Parliament has two main tasks: sharing legislative powers with the Council of Ministers and the Commission; and overseeing all EU institutions, but especially the Commission.

True

T/F: The HICP stands for Harmonized Index of Consumer Prices.

True

T/F: The difference in membership between the European System of Central Banks and the Eurosystem is the national central banks of EU members who have not adopted the euro.

True

T/F: The employment to population ratio is the proportion of people of working age who hold a job.

True

T/F: The fact that borrowers usually know more about their own risk than lenders is a source of information asymmetry.

True

T/F: The financial services industry lends and borrows money. Since the ability of the borrower to repay the loan depends upon future events, risk is a key feature of this industry.

True

T/F: The labour force consists of people who have jobs and those who are actively looking for one. The unemployment rate is the ratio of the number of people who have no job but are looking for one to the number of people in the labour force.

True

T/F: The principle of subsidiarity can be used in determining how subsidies can be used as a fiscal policy instrument in the EMU.

True

T/F: The stimulative effect of one nation's fiscal policy is linked to the fiscal policy of other nations via imports and exports. When a nation pursues an expansionary fiscal policy, its imports rise and this stimulates production in other nations.

True

T/F: There is one relevant novel element in the Treaty of Stability, Coordination and Governance (Fiscal Compact): It requires that every country adopt a budget rule enshrined in high-level legislation. It also mandates the setting up of a watchdog council composed of independent experts.

True

Argue why it may be preferable to adopt a fixed exchange rate regime. Now make the argument in defense of a floating exchange rate.

With a fixed exchange rate regime, high returns on domestic currency attract capital flows and a country can gain comparative trading advantages while protecting its own economic interests. The benefits of a floating exchange rate are the ability to carry out autonomous monetary policy and automatic stabilization.

What are the differences between medium-run growth effects and long-term effects? Explain briefly by referring to the main determinants of the two effects?

With medium-run growth effects, the higher growth disappears once the new equilibrium capital/labor ratio is reached, meaning there are declining returns to scale. On the other hand, with long-term growth effects, diminishing returns disappear and accumulation can continue forever. Medium-run growth is affected by physical capital accumulation, but long-run growth is determined by technological progress.

How does immigration tends to affect the sending (Foreign) and receiving (Home) nations?

With migration, wages will be pushed down in Home, hurting Home workers but helping Home capital owners, and increased in Foreign, helping Foreign workers but hurting Foreign capital owners. However, although migration creates winners and losers in both nations, collectively both nations gain due to increased efficiency. Unskilled workers complement skilled workers and capital, and immigrants often have a skill mix that is different from that of domestic workers. Complementarity of migrants, instead of substitution, and native factors of production provide a win-win situation.

Imagine a break-up of the euro. What is likely to happen to the exchange rate regimes of the ex-member countries?

Without monetary policy being conducted by the European Central Bank, each member country would need to reintroduce its national currency and the appropriate exchange rate for global trade.

The key requirement of the 2013 version of the Basel III measures adopted by the Basel Committee that the EU made were: (More than one answer is correct) __ Bank capital. __ Solidity __ Stability __ Leverage ratio. __ Liquidity ratio.

__ Bank capital. __ Leverage ratio. __ Liquidity ratio.

According to Baldwin and Wyplosz, the EU fulfills three of the following five optimum currency area criteria. Which ones are these?(More than one answer is correct) __ labour mobility __ openness __ production diversification __ homogeneity of preferences __ fiscal transfer conditions

__ openness __ production diversification __ homogeneity of preferences (partly)