Question 1

Explain why even owners of capital that cannot be moved can avoid more of the economic stability loss due to fixed exchange rates when Norway's economy is open to capital flows.

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Question 2

Richard Baldwin's estimate was that the euro increased the trade level of its users by

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Question 3

"The costs and benefits for a country from joining a fixed-exchange rate area such as the EMS depend on how well-integrated its economy is with those of its potential partners." Discuss.

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Question 4

Which of the following statements is the MOST accurate?

Accepted Answer

The introduction of the euro has facilitated trade among EU countries by eliminating currency conversion costs and reducing exchange rate risk, leading to an increase in trade between EU countries.

Question 5

Explain why after,say Norway unilaterally pegs the krone to the euro,domestic money market disturbances will no longer affect domestic output despite the continuation of float-rate regime against non-euro currencies.

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Question 6

Explain why when Norway unilaterally fixes its exchange rate against the euro but leaves the krone free to float against the non-euro currencies,it is unable to keep at least some monetary independence.

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Question 7

The theory of optimum currency areas predicts that

Accepted Answer

The theory of optimum currency areas predicts that fixed exchange rates are most appropriate for areas closely integrated through international trade and factor movements. This is because fixed exchange rates can help to eliminate exchange rate risk and facilitate trade and investment within the area. However, areas that are loosely integrated through international trade and factor movements may benefit more from floating exchange rates, which can provide flexibility and accommodate shocks to the economy. Therefore, choice C is the best answer.

Question 8

Is Europe an optimum currency area?

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Question 9

When did the UK decide to adopt the Euro?

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The UK has not adopted the Euro as their currency.

Question 10

What is one way to offset the economic stability loss due to fixed exchange rates?

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Question 11

How mobile is Europe's labor force?

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Question 12

Why does the LL schedule have a negative slope?

Accepted Answer

The LL schedule has a negative slope because as the degree of economic interdependence rises, the economic stability loss from pegging to the area's currencies falls. This is because higher interdependence typically means that economic shocks are more symmetric between the countries, reducing the cost of giving up independent monetary policy.

Question 13

How much trade do currency unions create?

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Question 14

Compared with inter-regional trade in the he United States,intra-EU trade

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Question 15

Explain the theory of optimum currency areas.

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Question 16

Explain why the oil price shocks after 1973 made countries unwilling to revive the Bretton Woods system of fixed exchange rates.See also Chapter 19.

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Question 17

Discuss the benefits and costs of joining a fixed-exchange area.

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Question 18

Explain why it may make sense for the United States,Japan,and Europe to allow their mutual exchange rate to float?

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Question 19

Why does the GG schedule have a positive slope?

Accepted Answer

The GG schedule represents the trade-off between the benefits a country receives from greater monetary efficiency through joining a fixed exchange rate area and the costs of losing its ability to use monetary policy independently. As a country becomes more economically integrated with the fixed exchange rate area, the benefits of the increased monetary efficiency become greater, causing the GG schedule to have a positive slope. Option A is incorrect because the opposite is true, the monetary efficiency gain a country gets by joining a fixed exchange rate area increases as its economic integration with the area increases. Option B is incorrect because it states the opposite of what is true. Option D is incorrect because the GG schedule refers to a fixed exchange rate area rather than a floating exchange rate area. Option E is incorrect because the monetary efficiency gain a country gets by joining a fixed exchange rate area does not remain constant after integration into the area.

Question 20

Explain what the GG-LL model tells us about the benefits of extensive trade between EU member states and comment on the significance of similarity of economic structure in this framework.

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Quiz 21: Optimum Currency Areas and the Euro