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| 1 | Adoption of the euro means a nation loses the ability to control its monetary policy at the national level. |
 | A) | TRUE |
| B) | FALSE |
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| 2 | Fiscal policy in euroland is also controlled at the EU level. |
| A) | TRUE |
| B) | FALSE |
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| 3 | A good deal of stabilisation 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. |
| A) | TRUE |
| B) | FALSE |
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| 4 | Monetary policy can be easily replaced by fiscal policy for stabilisation purposes. |
| A) | TRUE |
| B) | FALSE |
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| 5 | 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. |
| A) | TRUE |
| B) | FALSE |
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| 6 | The amount that one euroland nation borrows has no effect on the borrowing cost that other euroland nations face. |
| A) | TRUE |
| B) | FALSE |
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| 7 | Public debts as a share of GDP have remained fairly constant since 1975. |
| A) | TRUE |
| B) | FALSE |
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| 8 | The ‘deficit bias’ is the tendency of governments to: |
| A) | be biased against running large deficits. |
| B) | be biased against sub-national governments (cities, regions, provinces, etc.) running deficits. |
| C) | increase spending and cut taxes in an effort to please voters in the short run. |
| D) | run surpluses in good times and deficits in bad times. |
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| 9 | Assume that large budget deficits push interest rates up. When each nation has its own currency and thus its own interest rate, the ‘penalty’ for excessive government borrowing is paid for by the nation’s taxpayers. Higher interest rates mean higher interest payments on the national debt and this eventually requires higher taxes or lower government spending. By contrast, in a monetary union: |
| A) | there is only one interest rate, so the penalty for one nation’s borrowing is paid in part by other nations. |
| B) | all members have a tendency to over-borrow since the national government gains the full political benefit of the extra spending, or tax cut, but it does not face the full interest rate cost of doing so. |
| C) | heavy borrowing by one member can trigger capital inflows that lead to an appreciation of the euro, thus harming the export competitiveness of all euroland members. |
| D) | All of the above. |
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| 10 | The Stability and Growth Pact has a number of weaknesses, including: |
| A) | National governments may use it to blame Brussels for politically painful decisions and this may undermine public support for the EU. |
| B) | The 3% limit does not leave much room for governments to react to a series of adverse shocks. |
| C) | The Pact is asymmetric in that it is binding in bad times but not in good times. |
| D) | All of the above. |
| E) | All of the above except b. |
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| 11 | 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 stabilisation policy. |
| A) | regional, national |
| B) | structural, macroeconomic |
| C) | political, sociological |
| D) | precise, less precise |
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| 12 | The fiscal policy of one country may spill over to other countries via the _________ channel, the _________ channel and the _________channel. Such spillovers, called externalities, mean one country’s fiscal policy actions can help or hurt other countries. |
| A) | export and import, stock market, external exchange rate |
| B) | income and spending, inflation, borrowing costs |
| C) | labour market, capital market, land market |
| D) | taxation, expenditure, budget deficit |
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| 13 | 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. The result would be sizeable capital _______ and euro _______. |
| A) | labour unions, debt, inflows, adoption |
| B) | markets, price controls, inflows, abandonment |
| C) | the European Parliament, laws, controls, appreciation |
| D) | markets, debt, outflows, depreciation |
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| 14 | According to the theory of _______, the spillovers mentioned in the previous question suggest that the EU should undertake some collective discipline of budget deficits. |
| A) | fiscal federalism |
| B) | optimal currency area |
| C) | customs unions |
| D) | monetary neutrality |
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| 15 | There is a standard argument for the _______ of nations’ fiscal policy, since if only one nation attempts to fight a growth slowdown with a fiscal expansion it tends to run a trade deficit that can put downward pressure on its exchange rate. This is not a problem in the Eurozone since there is no exchange rate to be affected. |
| A) | abandonment |
| B) | coordination |
| C) | control at the EU level |
| D) | clarification |
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| 16 | The Stability and Growth Pact considers that deficits are excessive when they are above ______ percent 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, in balance |
| D) | 3, balanced or in surplus |
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| 17 | If the Council of Economic and Finance Ministers decides a member is in violation of the Pact, and the country fails to take corrective action and to bring its deficit below 3% by the deadline set by the Council, the nation faces sanctions taking the form of a ________. Deposits are imposed each _______ until the excessive deficit is corrected. If the excess is not corrected within ______ years the deposit is converted into a fine; otherwise it is returned. |
| A) | censure, month, 2 |
| B) | censure, 6 months, 10 |
| C) | non-interest bearing deposit, year, 2 |
| D) | non-interest bearing deposit, 5 years, 10 |
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| 18 | 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 |
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| 19 | In November 2003, France and Germany escaped the sanction procedure of the Stability and Growth Pact because: |
| A) | They had brought their deficit under the 3% limit. |
| B) | The Commission did not request that the procedure be triggered. |
| C) | The Commission requested that the procedure be triggered but the Council did not follow the recommendation. |
| D) | The Commission and the Council both decided to ignore the case. |
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| 20 | EU member countries that did not join the euro area: |
| A) | Are not subject to the Stability and Growth Pact. |
| B) | Are subject to the Stability and Growth Pact but cannot be fined. |
| C) | Are subject to the Stability and Growth Pact and can be fined |
| D) | Are subject to the Stability and Growth Pact, can be fined, and participate in the decision to fine other countries as well.
Answer: B |