Deck 19: The European Debt Crisis

Question 1

The European Economic Community was set up to _____.

A)establish a single currency throughout its member nations
B)establish travel and trade rules throughout its member nations
C)establish strict trade barriers prohibiting outside trade by its member nations
D)establish a powerful government to govern all its member nations

Answer 1

B

Question 2

The euro, as a common currency, was in use in the financial market only between _____.

A)1999 and 2001
B)2000 and 2010
C)1999 and 2010
D)2000 and 2005

Answer 2

A

Question 3

Article 123 of the Treaty on the functioning of the European Union stated that the

A)European Union would bailout any member country in distress.
B)member countries had to maintain a deficit to GDP ratio of 4 percent.
C)European Central Bank could not purchase member nation debt.
D)member countries had to keep a fixed gold deposit with the European Central Bank.

Answer 3

C

Question 4

Article 126 of the Treaty on the functioning of the European Union stated that the member nations had to work to a debt to GDP ratio of

A)equal to 60 percent.
B)equal to 1 percent.
C)higher than 60 percent.
D)less than 60 percent.

Question 5

Which of the following reasons promoted lending to the poorer member countries in the European Union during 2001-2007?

A)The long-term interest rates in the poorer countries were as low as the interest rates in the richer member countries.
B)The investment in human capital in the poorer countries was higher than the investment in the richer countries.
C)The debt to GDP ratio was much lower in the poorer countries than in the richer countries.
D)The poorer countries experienced lower rates of inflation than the richer countries.

Question 6

Which of the following articles of the Treaty on the functioning of the European Union prohibited bailouts of one country by the union or by any member state unless it was viewed as necessary?

A)Article 124
B)Article 125
C)Article 126
D)Article 127

Question 7

In 2001, Greece had a per-capita GDP _____ percent lower than Netherland's per-capita GDP.

A)20
B)30
C)40
D)50

Question 8

Relative to the first quarter of 2000, housing prices _____ in Ireland between 2000 and 2009.

A)doubled
B)tripled
C)increased by 150 percent
D)decreased by 100 percent

Question 9

Which of the following treaties led to the creation of the common European currency, the euro?

A)The Merger Treaty
B)The Maastricht Treaty
C)The Treaty of Westminster
D)The Treaty of Commerce and Navigation

Question 10

During the period from 2001 to 2007, investors were indifferent between lending to a rich or a poor euro-member nation because

A)the short-term interest rate on government Treasury bonds was at all-time high across all European nations.
B)the poorer member nations projected a growth rate that matched the growth rates of the rich member nations
C)all European nations were experiencing booms and busts in tandem.
D)interest rates on 10-year government debt were largely identical across Europe's largest governments during the period.

Question 11

_____ were the main sources of mortgage loans in Europe between 2000 and 2009?

A)Covered bonds
B)Treasury bonds
C)Eurobonds
D)Global bonds

Question 12

Relative to the first quarter of 2000, housing prices _____ in the United States between 2000 and 2009.

A)doubled
B)tripled
C)increased by 150 percent
D)decreased by 100 percent

Question 13

Article 126 of the Treaty on the functioning of the European Union stated that the member nations had to maintain a deficit to GDP ratio of

A)less than 3 percent.
B)higher than 5 percent.
C)equal to 3 percent.
D)equal to 4 percent.

Question 14

_____ countries were part of the euro currency union at the time of its creation.

A)12
B)16
C)17
D)19

Question 15

Which of the following was true of countries willing to join the euro?

A)The countries had to give up the ability to use monetary policy as individual countries.
B)The countries had to maintain a debt to GDP ratio of more than 60 percent.
C)The countries had to lose the eligibility to participate in foreign trade.
D)The countries had to maintain bank balances in their home currencies.

Question 16

In 2001, Spain was _____ percent poorer than Germany.

A)10
B)15
C)20
D)25

Question 17

Which of the following is true of the transition process of individual European currencies to the euro?

A)The transition process was complicated and time consuming.
B)Bank balances in these countries were converted to euro-denominated deposits.
C)Actual paper and coin currencies in circulation in individual countries were converted to dollars.
D)The gold deposits that were kept by the individual countries with their central banks were recalled.

Question 18

Which of the following organizations was the predecessor to the European Union?

A)Assembly of European Regions
B)Council of Europe
C)European Economic Community
D)Central European Free Trade Agreement

Question 19

_____ were the main sources of mortgage loans in the United States between 2000 and 2009?

A)Covered bonds
B)Mortgage-backed securities
C)Loans from credit unions
D)Credit card receivables

Question 20

Which of the following was an effect of the creation of the euro evident during 2001-2007?

A)Housing prices dipped to an all-time low in the richer member nations.
B)It led to the monopolization of the foreign exchange market by the euro.
C)Several southern European countries saw an economic downturn.
D)The poorer member nations saw relatively rapid economic growth.

Question 21

Which of the following is one of the main reasons behind the high debt to GDP ratio in Greece?

A)Population explosion
B)Labor migration
C)Tax evasions
D)Capital flight

Question 22

In which year was Ireland's debt to GDP ratio equal to Portugal's debt to GDP ratio at 100 percent?

A)2008
B)2009
C)2010
D)2011

Question 23

In which year did GDP growth in the United States fall below -2 percent?

A)2001
B)2003
C)2007
D)2009

Question 24

To counter the negative effects of the Great Recession, the U.S.

A)increased the long-term interest rate to 8 percent.
B)reduced the inflation rate to zero.
C)induced explosions in deficits through fiscal policies.
D)induced implosions in deficits through fiscal policies.

Question 25

In which year did Ireland's deficit to GDP ratio fall below -30 percent?

A)2008
B)2009
C)2010
D)2011

Question 26

In which year did GDP growth in Greece fall below -6 percent?

A)2003
B)2005
C)2009
D)2011

Question 27

In 2000, Italy's per-capita GDP was _____ percent _____ than the EU-27 average.

A)36; lower
B)24; higher
C)18; higher
D)6; lower

Question 28

Which of the following countries offered bailouts for the weaker economies in the European Union during the economic downturn?

A)Italy and Germany
B)Germany and France
C)France and Spain
D)Spain and Greece

Question 29

The per capita GDP in Italy declined steadily between 2000 and 2010. One of the main causes of this crisis is that

A)Italy's national debt was relatively low prior to the crisis.
B)the birth rate in Italy plummeted during the period.
C)tax evasions by individuals and businesses were very pervasive during the period.
D)the pension system in Italy could not support the increasing number of retired workers during the period.

Question 30

Which of the following is true of a covered bond?

A)A covered bond is the same as a mortgage-backed security except that it is popular in the United States than in Europe.
B)In case of covered bonds, the obligation of the loan remains with the originating bank that gives out the loan.
C)In case of covered bonds, the obligation of the loan immediately transfers to the institution taking the loan.
D)A covered bond is the same as a mortgage-backed security except that it is popular in the Europe than in the United States.

Question 31

Which of the following is one of the main causes of the fiscal crisis in Greece?

A)Greece experienced high birth rate and low death rate between 2000 and 2010.
B)Greece had a high national debt and high deficits prior to the crisis.
C)Greece did not have a strong labor force to support production.
D)Greece's prime minister did not have the desire to tackle difficult structural issues.

Question 32

Which of the following policies did the United States undertake to mitigate the Great Recession?

A)It approached the European Central bank to purchase its debts at low rates.
B)It engaged in target asset relief programs.
C)It induced implosions in deficits through fiscal policies.
D)The Treasury sold mortgage-backed securities at record high prices.

Question 33

The weaker economies in the European Union were forced to _____to be eligible to receive bailouts.

A)increase spending and taxes
B)decrease spending and taxes
C)increase spending and cut taxes
D)decrease spending and increase taxes

Question 34

Which of the following is one of the main causes of economic crises in Ireland and Spain?

A)The bursting of the housing bubble
B)High debt to GDP ratios
C)High long-term interest rates
D)Population explosion

Question 35

Which of the following European countries used fiscal policy to induce explosions in deficits to mitigate recession?

A)France
B)Germany
C)Italy
D)Spain

Question 36

Which of the following resulted due to the budget reforms undertaken by the weaker economies to receive assistance?

A)Unemployment rose dramatically in the weaker economies.
B)Taxes decreased dramatically in the weaker economies.
C)Economic activity increased in the weaker economies.
D)Inflation rates decreased in the weaker economies.

Question 37

In which year did long-term interest rates in Greece rise to an all-time high of close to 30%?

A)2003
B)2005
C)2009
D)2011

Question 38

In which year did the unemployment rate in Germany fall compared to the EU-27 average?

A)2006
B)2007
C)2008
D)2010

Question 39

Compared to the first quarter of 2000, housing prices in Spain increased by 250% in the _____.

A)fourth quarter of 2003
B)third quarter of 2007
C)second quarter of 2009
D)first quarter of 2011

Question 40

Had there been no coverage of the Irish and Spanish bonds by the larger banks, _____.

A)there would have been no deficit implosions in Ireland and Spain.
B)there would have been more tax evasions by individuals in Ireland and Spain.
C)there would have been more funds for Irish and Spanish banks to lend to their customers.
D)there would have been no housing bubbles in Ireland and Spain.

Question 41

Which of the following diminished the desirability of a Greek exit?

A)The revocation of Articles 123 and 125 of the Treaty on European Union
B)The exit of Italy and Spain from the euro
C)The sudden rise in euro-denominated deposits
D)The threat of a Greek exit itself

Question 42

Greece did not engage in expansionary monetary policy to pull out of recession because

A)it does not have its own central bank to use its own monetary policy.
B)it used powerful fiscal policy tools and did not feel the need to use monetary policy tools.
C)it was bailed out by Germany.
D)it opted out of the European Union.

Question 43

The formal recognition of the threat to the European Union allowed for _____ because the systemic risk clauses of Articles 123 and 125 were invoked.

A)increases in spending
B)cross-national bailouts
C)purchase of debt by the European Central Bank
D)tax cuts

Question 44

As a result of the austerity policy

A)the AD curve shifts to AD''.
B)the AD curve shifts to AD'.
C)the AS curve shifts to AS'.
D)the AS curve shifts to AS''.

Question 45

Weaker European countries could not engage in programs such as the troubled asset relief programs to pull themselves out of the recession because

A)they had planned to pull out of the European Union.
B)they devaluated their home currencies.
C)they faced prohibitive interest rates on borrowing.
D)they are prohibited to do so by the European Central Bank.

Question 46

In which of the following countries did unemployment rate fall between 2009 and 2011?

A)Spain
B)Italy
C)Germany
D)Ireland

Question 47

Which of the following is a reason why the governments of the weaker economies of Europe have limited ability to engage in bank bailouts?

A)Their home currencies are volatile and vulnerable to depreciation.
B)They do not have the ability to borrow the required amount of funds.
C)They cannot reform their budgets to be able to receive assistance.
D)They are prohibited to do so by their central banks.

Question 48

If Greece opted out of the euro and printed its own currency

A)the prices of domestically produced goods in Greece would rise.
B)the prices of domestically produced goods in Greece would fall.
C)Greece would end-up producing more labor-intensive goods.
D)Greece would end-up producing more capital-intensive goods.

Question 49

The government of Imbrusia introduces new taxes and cuts spending to mitigate recession. Which of the following is likely to happen in Imbrusia according to the Keynesians?

A)Increase in investment
B)Increase in consumption
C)Increase in inflation
D)Increase in unemployment

Question 50

Which of the following statements is true of austerity?

A)It increases economic activity.
B)It increases tax revenues.
C)It increases job opportunities.
D)It could increase the demand for social safety nets.

Question 51

The Greeks who had anticipated that Greece would opt-out of euro

A)converted their liquid assets to gold deposits.
B)increased their euro-denominated deposits in Greek banks.
C)closed their euro-denominated accounts and took those to foreign banks.
D)purchased government securities from the central bank of Greece.

Question 52

If Appleland decides to adopt austerity policies, it will

A)increase spending and taxes
B)decrease spending and taxes
C)increase spending and cut taxes
D)decrease spending and increase taxes

Question 53

Which of the following is an unintended consequence of austerity policies?

A)Hyperinflation
B)Large budget deficits
C)Reduction in taxes
D)Reduction in unemployment

Question 54

From the Keynesian point of view, Appleland's austerity policy

A)does not cause any change in its real GDP.
B)decrease its real GDP to RGDP'.
C)increase its price level to P''.
D)does not cause any change in its price level.

Question 55

Which of the following is a possible outcome of austerity policies?

A)Increase in tax revenues
B)Decrease in economic activity
C)Decrease in budget deficits
D)Increase in employment opportunities

Question 56

The threat of a Greek exit from the euro system

A)led to the exit of Spain from the euro.
B)increased the viability of the Greek exit.
C)spurred economic activity in Greece.
D)left Greek banks bankrupt.

Question 57

The Germans and the French were compelled to keep Greece in the euro because

A)they feared that the Greek exit would lead to a collapse of the entire euro system.
B)they had invested a large amount in the form of bailout packages to Greece.
C)they relied heavily on Greece for trade and feared that they would lose their trading partner.
D)they feared that their home currencies would be devalued if Greece opted out of euro.

Question 58

Which of the following would result if Greece decided to order all Greek banks to convert euro-denominated accounts to drachma-denominated accounts?

A)A deflation would occur in the economy of Greece.
B)The purchasing power of drachma would decline.
C)The value of euros would decline relative to the value of drachmas.
D)Domestic consumers in Greece would prefer imported goods.

Question 59

The sole mission of the European Central Bank at the time of its creation was

A)to control inflation.
B)to boost employment.
C)to increase saving.
D)to reduce long-term interest rates

Question 60

The government of Auspicia increases taxes and cuts spending during a recession. Which of the following is likely to happen in in Auspicia according to the Keynesians?

A)Decrease in economic activity
B)Increase in investment
C)Increase in consumption
D)Reduction in unemployment