Question 1

What is an "optimal currency area"? Also,discuss the conditions that must be satisfied for an optimal currency area to exist.

Accepted Answer

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Question 2

Does Europe constitute an optimal common currency area? Why?

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Question 3

Assume a country is in a fixed exchange rate regime.Now suppose that individuals expect that policy makers will devalue its currency.Explain the various actions that policy makers can choose in response to this expected devaluation.

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Question 4

According to Mundell,countries to constitute an optimal currency area need to satisfy one of the two conditions.Explain these conditions.

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Question 5

Euro coins and bank notes were introduced in January

Accepted Answer

Euro coins and bank notes were introduced in January 2002. The Euro currency was launched in electronic form on January 1, 1999, but it took three more years to get the physical coins and bills into circulation.

Question 6

Policy makers can select from a number of different exchange rate regimes.One of those options is a "hard peg." Which of the following best represents a hard peg?

Accepted Answer

A hard peg is a fixed exchange rate regime where the value of a currency is fixed to another currency, such as the U.S. dollar or euro, or to a commodity like gold. A currency board is a specific form of hard peg where the central bank is prohibited from issuing new currency unless it is fully backed by foreign reserves. Revaluation is a change in the exchange rate that increases the value of a currency relative to another currency or a basket of currencies. A flexible exchange rate regime allows the exchange rate to be determined by market forces. The EMS (European Monetary System) was a fixed exchange rate system used in Europe prior to the adoption of the euro. Therefore, the best choice that represents a hard peg is B - a currency board.

Question 7

Explain the cases for and against flexible and fixed exchange rate regimes.

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Question 8

Assume a country is in a fixed exchange rate regime.Explain what factors might cause individuals to expect that a country will devalue its currency.

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