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Self-test Questions
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1

Optimum currency area theory is used to think about whether it is good for a country to join the euro.
A)TRUE
B)FALSE
2

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.
A)TRUE
B)FALSE
3

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.
A)TRUE
B)FALSE
4

If workers are highly mobile between two nations, those nations are more likely to form an optimal currency area.
A)TRUE
B)FALSE
5

According to the optimal currency area theory, a common language and religion are key determinants of whether two nations should share a single currency.
A)TRUE
B)FALSE
6

An example of an asymmetric shock to a 2 nation currency union would be a rise in the price of oil when one nation was an oil importer and the other was an oil exporter.
A)TRUE
B)FALSE
7

One of the reasons that the US is closer to an optimal currency area than the EU is that its federal tax and transfer system tends to automatically shift money from regions that are booming to regions that are depressed.
A)TRUE
B)FALSE
8

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% to 1% over a 5 year horizon.
A)TRUE
B)FALSE
9

The HICP stands for Harmonised Index of Consumer Prices.
A)TRUE
B)FALSE
10

The European Central Bank is one of the most politically independent central banks in the world.
A)TRUE
B)FALSE
11

The EU Parliament oversees the operation of the European Central Bank.
A)TRUE
B)FALSE
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12

Referring to the diagram, and the following list choose the correct answer from the choices below.
  • (i) The ‘practicability’ curve is downward sloped since a currency gets more useful when more people use it;
  • (ii) the ‘practicability’ curve is downward sloped because it becomes less practical to set a single monetary policy when the area covered gets larger;
  • (iii) The usefulness curve is upward sloped since the central bank has an easier time setting monetary policy for a large area where minor, regional variations tend to cancel each other out;
  • (iv) The usefulness curve is upward sloped since a currency gets more useful when more people use it.
A)(i) and (iii) are true.
B)(ii) and (iv) are true.
C)(ii) and (iii) are true.
D)(i) and (iv) are true.
13

In the diagram, the intersection of the two curves 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 maximised.
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 nil.
D)All of the above.
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14

In the diagram, λ is the initial equilibrium exchange rate since at λ:
A)The supply and demand for short-term demand deposits are equal.
B)the costs and benefits of expanding the monetary union are equal.
C)the nation’s output (i.e. GDP) just equals the demand for its output.
D)the nation’s wages are equal to those of foreigners and thus the current account is in balance.
15

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).
16

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 is 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.
A)(i), (ii) and (iii).
B)(i), (iii) and (iv).
C)(ii), (iv) and (vi).
D)(iii), (v) and (vi).





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