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Multiple Choice Quiz
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1.
An optimum currency area can be defined as a group of countries:
A)Using the same currency
B)With independent central banks
C)For which the benefits of a common currency exceed the costs
D)Sharing common borders
E)With similar economic and political systems
2.
All of the following can be considered potential gains from participating in a monetary union EXCEPT:
A)The elimination of exchange rate volatility
B)Strengthening the use of monetary policy in stabilising the domestic economy
C)The elimination of currency conversion costs
D)Increased trade between partner countries
E)Greater price transparency
3.
A positive demand shock can be defined as:
A)An unexpected increase in planned aggregate expenditure
B)An unexpected increase in the rate of inflation
C)An increase in potential output
D)An unexpected increase in the relative price of oil
E)The introduction of new technology which increases average labour productivity
4.
The most important cost of joining a monetary union is?
A)The restrictions it places on fiscal policy
B)Lower employment in the financial sector
C)The loss of revenue from foreign exchange transactions
D)The inability to use monetary policy to stabilise the domestic economy
E)The necessity to remove capital controls
5.
The European Central Bank’s ‘one-size’ monetary policy implies that:
A)Interest rates set by the ECB apply in all Eurosystem economies
B)Interest rates set by the ECB are optimal for all Eurosystem economies
C)All Eurosystem economies experience symmetric shocks
D)Velocity is the same in all Eurosystem economies
E)The money supply growth rate is the same in all Eurosystem economies
6.
Some economists have argued that the U.K. might gain from joining the Eurosystem because:
A)It would lead to permanently lower interest rates
B)The Bank of England cannot control the U.K. money supply
C)It would lead to lower volatility against the U.S. dollar
D)A fixed exchange rate increases the effectiveness of monetary policy
E)Membership could increase trade between the U.K. and the Eurosystem economies
7.
The U.K.’s convergence gap with the Eurosystem can be defined as:
A)The difference between potential output in the U.K. and average potential output in Eurosystem economies
B)The difference between the actual level of integration with the Eurosystem the level that would guarantee that the U.K.’s economic growth rate would match that of the Eurosystem
C)The difference between the actual level of integration with the Eurosystem and the level that would ensure that euro membership would not lead to a net loss to the U.K. economy
D)The difference between real GDP in the U.K. and average real GDP in the Eurosystem
E)The difference between real GDP per person in the U.K. and average real GDP per person in the Eurosystem
8.
All of the following can be considered as criteria for a successful monetary union EXCEPT:
A)Synchronised business cycles
B)Symmetric demand shocks
C)Flexible labour markets
D)Fixed exchange rates with non-participating countries
E)Low levels of inflation inertia
9.
The ECB is unlikely to respond to asymmetric shocks because:
A)It is only concerned with inflation
B)Its primary concern is with the average Eurosystem inflation rate
C)It cannot lend to Eurosystem governments
D)It cannot react to recessionary or expansionary gaps
E)Dealing with asymmetric shocks is the responsibility of National Central Banks
10.
In 1997 the British Chancellor, Mr. Gordon Brown, announced five economic tests which the U.K. would be required to pass before joining the Eurosystem. These include all of the following EXCEPT:
A)Stability of the sterling-euro exchange rate
B)The U.K. business cycle and economic structures are convergent with those of the Eurosystem
C)The U.K. economy is sufficiently flexible to deal with asymmetric shocks
D)Joining the euro would not be detrimental to Britain’s financial services sector
E)Joining the euro would create a favourable environment for investment in the U.K.





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