Site MapHelpFeedbackSelf-test Questions
Self-test Questions
(See related pages)





1Optimum currency area theory is used to think about whether it is good for a country to join the euro.
A)TRUE
B)FALSE


2A 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


3An 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


4If workers are highly mobile between two nations, those nations are more likely to form an optimal currency area.
A)TRUE
B)FALSE


5According 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


6An 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


7One 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


8The 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


9The HICP stands for Harmonised Index of Consumer Prices.
A)TRUE
B)FALSE


10The European Central Bank is one of the most politically independent central banks in the world.
A)TRUE
B)FALSE


11The EU Parliament oversees the operation of the European Central Bank.
A)TRUE
B)FALSE
<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0077111192/336565/baldwinch16mcq12.jpg','popWin', 'width=410,height=310,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (14.0K)</a>



12Referring to the diagram, and the following list choose the correct answer from the choices below.
  • (i) The ‘marginal cost' curve is downward sloped since a currency gets more useful when more people use it;
  • (ii) the ‘marginal cost' curve is downward sloped because it becomes less practical to set a single monetary policy when the area covered gets larger;
  • (iii) The ‘marginal benefit’ 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 ‘marginal benefit’ 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.


13In 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.
<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077111192/117919/ch13q14eq02.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (32.0K)</a>



14In 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.


15Referring 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).


16Referring 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).


17The difference between the McKinnon and Kenen criteria is that the former considers that deep trade integration makes the exchange rate inefficient to establish competitiveness while the latter considers that deep trade integration reduces the odds of asymmetric shocks:
A)True
B)False





To learn more about the book this website supports, please visit its Information Center.
(c)2006 McGraw-Hill Education Europe
Any use is subject to the Terms of Use and Privacy Policy.
McGraw-Hill Education Europe is one of the many fine businesses of The McGraw-Hill Companies.


Baldwin & Wyplosz 2eOnline Learning Center

Home > Chapter 16 > Self-test Questions