Study Questions (with Answers) Lecture 17 European Monetary Unification and the Euro

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1 Study Questions (with Answers) Page 1 of 4(5) Study Questions (with Answers) Leture 17 pean Monetary Unifiation and the Part 1: Multiple Choie Selet the best answer of those given. 1. The is a. The ommon urreny that the members of the pean Union adopted when they established the Exhange Rate Mehanism in b. The unit by whih all new finanial transations in member ountries of the Eonomi and Monetary Union were denominated as of January 1, Equal to one deutshe mark. d. A tunnel onneting Frane and England. e. Baked by gold. b 2. Whih of the following ountries did not beome a member of the Eonomi and Monetary Union as of January 1, 1999? a. Britain b. Frane. Germany d. Italy e. Spain a 3. When it ame into existene on Jan 1, 1999, the euro was worth $1.18 beause a. peans sought purhasing power parity with the U.S. dollar. b. This happened to be the value of the Deutshe Mark at the time.. This was the market value of the basket of urrenies in one ECU. d. This made the after-tax value of one euro equal to one dollar. e. The number was hosen to ommemorate the year of the end of World War I.

2 Study Questions (with Answers) Page 2 of 4(5) 4. Among the benefits that pean monetary unifiation was expeted to provide were the following: a. Greater sovereignty for member governments to pursue independent poliies. b. Freedom for individual ountries to stimulate their national eonomies.. It ties together all urrent members of the pean Union into single unit. d. It satisfies the popular demand by peans for a single urreny. e. Greater ompetition aross national borders. e 5. Sine the euro ame into existene on January 1, 1999, its value relative to the U.S. dollar has a. Started at $1 and remained there. b. Rose steadily from a little less than $1 to about $1.40 in the last few weeks.. Started at more than $1, fell to less than $1, then rose to more than $1 later. d. Moved by amounts very similar to the U.S. stok market. e. Been rigidly ontrolled by unsterilized exhange market intervention. 6. Whih of the following is not a reason why the ountries of the euro zone may be expeted to have diffiulty adjusting to asymmetri shoks to their eonomies? a. Labor is very mobile among the ountries of pe and will quikly abandon any ountry that experienes a negative shok. b. pe does not have a mehanism for fisal transfers that would permit ountries doing well to assist those who are in trouble.. If one pean ountry has more inflation than another, it annot depreiate its urreny in order to keep its goods ompetitive. d. Governments are onstrained by their agreement from large uses of defiit spending to stimulate their eonomies. e. The labor market poliies of pean ountries make it diffiult for wages to adjust up and down in response to hanges in demand.

3 Study Questions (with Answers) Page 3 of 4(5) a 7. Whih ountry first adopted the euro in 2015? a. Bulgaria b. East Germany. Lithuania d. Poland e. Greee 8. What is a hairut and what does it have to do with the zone risis? a. An aross-the-board redution in tariffs on imports; required of Greee and Portugal on their imports from other zone ountries in return for assistane. b. A mild form of austerity; being asked of Greee instead of the more severe budget uts that would be alled salping.. A severe form of austerity; insisted on by Germany in order to reassure German voters for the ost of bailing out Greee. d. A write-down in the value of a debt, so that lenders take a substantial loss; used as a way to redue the government debt of Greee loser to its GDP. e. A negotiated redution in the interest rate on government bonds; used to ease the debt burden on Greee. d

4 Study Questions (with Answers) Page 4 of 4(5) Part II: Short Answer Answer in the spae provided. 1. Explain the meaning of the aronyms BAFFLING PIGS and DUKS. BAFFLING PIGS are the 12 ountries that were initially part of the Zone, while DUKS are the three ountries of the EU that were not. Sine the reation of the euro, Slovenia, Cyprus, Estonia, Latvia, Lithuania, Malta, and Slovakia have also been added to the eurozone, and they are not part of this aronym. B= Belgium A= Austria F= Frane (or Finland) F= Finland (or Frane) L= Luxembourg I= Italy (or Ireland) N= Netherlands G= Germany (or Greee) P= Portugal I= Ireland (or Italy) G= Greee (or Germany) S= Spain D= Denmark UK= United Kingdom S= Sweden 2. For eah of the following, indiate whether it would be expeted to gain or lose from pean monetary unifiation, and write one sentene indiating why. a. A large ompany that manufatures household produts in Frane for sale throughout pe. Gain / Lose Gain Why? Costs will fall when they no longer have to operate in several urrenies. b. The owners of a small family-run restaurant in a village of Italy Gain / Lose Lose Why? They fae the ost of the hangeover (suh as printing new menus) without any benefits.

5 Study Questions (with Answers) Page 5 of 4(5). A large ommerial bank in Berlin Gain / Lose Gain Why? Will be able to onsolidate with banks in other pean ountries. 3. True or False: True Explain: Denmark and the U.K. hose to opt out of the adoption of the euro, even though they ratified the Maastriht Treaty. Denmark rejeted the treaty at first but later voted to aept the treaty after opting out of adopting the euro itself. True or False: False Explain: An optimal urreny area is the geographi region within a ountry where the urreny issued by loal government primarily irulates As explained by Levin, an optimal urreny area is a group of ountries for whih the benefits of a having a ommon urreny outweigh the osts. 4. What do the following aronyms represent, and what do they atually mean? ECU pean Curreny Unit = the basket of pean urrenies that formed the basis of the pean Monetary System EMU Eonomi and Monetary Union = group of ountries that set out through the Maastriht Treaty to unify their eonomies and adopt a ommon urreny EMS pean Monetary System = the system established in 1979 in whih the pean urrenies pegged to eah other but floated against outsiders and used adjustments of the pegs and some apital ontrols to remain viable ERM Exhange Rate Mehanism = the arrangement of mutually pegged exhange rates that was part of the EMS