Question 1

What country was admitted to the EMU on January 1,2001?

Accepted Answer

Greece was admitted to the European Monetary Union (EMU) on January 1, 2001, adopting the euro as its currency. Spain, Ireland, and France were founding members of the EMU in 1999.

Question 2

In 1997,the ________________ was negotiated to further tighten the fiscal constraint of participating countries in European Monetary Union.

Accepted Answer

The Stability and Growth Pact was negotiated in 1997 to further tighten the fiscal constraint of participating countries in European Monetary Union. The Maastricht Treaty established the framework for the European Monetary Union, including criteria for joining, while the European Currency Unit was a precursor to the euro as a common currency. The European Monetary System was the predecessor to the European Monetary Union.

Question 3

The exchange rate arrangement whereby the nation fixes the exchange rate and allows the nation's money supply to increase or decrease only in response to balance-of-payments surpluses or deficit is known as (a):

Accepted Answer

In a currency board arrangement, a country fixes its exchange rate to a foreign currency, typically that of a major economic power such as the US dollar or Euro. The central bank of the country then ensures that the value of its domestic currency remains fixed to the foreign currency by holding large reserves of the foreign currency. The domestic money supply can only increase or decrease in response to inflows or outflows of foreign currency, i.e., balance-of-payments surpluses or deficits, via changes in the central bank's reserve holdings. This system helps to maintain exchange rate stability and control inflation, but it can also be restrictive in terms of the country's monetary policy options.

Question 4

_________________ are the most extreme form of a fixed exchange rate system,short of adopting a common currency or dollarization.

Accepted Answer

Currency board arrangements are the most extreme form of a fixed exchange rate system as they involve the strictest commitment to maintaining a fixed exchange rate. Under a currency board arrangement, a country completely outsources its monetary policy to a currency board, which sets the exchange rate and maintains it by buying and selling its own currency in unlimited quantities. This leaves no room for discretion or adjustment by the central bank, making it a very rigid system.

Question 5

In 1998,the _______________ was established as a federal structure of the national central banks of the European Union.

Accepted Answer

The European Central Bank (ECB) was established in 1998 as a federal structure of the national central banks of the European Union. The European Monetary System (A) was created in 1979 and dissolved in 1999, while the European Currency United (B) and European Monetary Institute (D) are not correct names for the established structure.

Question 6

Which of the following EU countries did not accept Euro as its currency

Accepted Answer

Sweden did not accept Euro as its currency.

Question 7

At the beginning of 1999,the European Monetary System became the _________________ with the introduction of the euro and the adoption of a common monetary policy by the European Central Bank.

Accepted Answer

The European Monetary System became the European Monetary Union at the beginning of 1999 with the introduction of the euro and the adoption of a common monetary policy by the European Central Bank. The European Monetary Institute was the precursor to the European Central Bank, the European Currency Unit was a unit of account used in the European Community before the introduction of the euro, and the European Monetary Cooperation Fund was a fund established to provide financial assistance to member states with balance of payments problems.

Question 8

The second stage of the monetary union,approved at a meeting in Maastricht in December 1991,called for the creation of the________________.

Accepted Answer

The second stage of the monetary union, approved at a meeting in Maastricht in December 1991, called for the creation of the European Monetary Institute (EMI). The EMI was established in January 1994 and served as a precursor to the European Central Bank, which was created in 1998. The EMI was responsible for coordinating monetary policy among the EU member states and preparing for the introduction of the euro currency.

Question 9

The institution similar to the Federal Reserve System in the United States that would control the money supply and issue the single currency of the European Union is the:

Accepted Answer

The European Central Bank (ECB) is the institution responsible for controlling the money supply and issuing the euro currency in the European Union. The European Monetary System (EMS) refers to a system formerly in place which helped to stabilize currency exchange rates in Europe, but it was replaced by the Economic and Monetary Union (EMU) in 1999. The European Currency Unit (ECU) was a basket of currencies used as a unit of account by the European Community before the introduction of the euro. The European Monetary Institute (EMI) was a precursor institution to the ECB, which was responsible for preparing the transition to the euro.

Question 10

The situation whereby a nation adopts another nation's currency as its legal tender is known as:

Accepted Answer

The situation whereby a nation adopts another nation's currency as its legal tender is known as dollarization. This means that the country completely gives up its own currency and relies on the adopted currency for all its transactions. Currency board arrangements refer to a fixed exchange rate system where a country's central bank promises to exchange its currency with a foreign currency at a fixed rate. Crawling peg system refers to a fixed exchange rate system where the exchange rate is adjusted periodically to reflect changes in inflation and other economic variables. Managed floating exchange rate system refers to a flexible exchange rate system where the central bank intervenes in the forex market to manage the exchange rate.

Question 11

Under the ________________,the creation of the European Monetary Institute was created as a forerunner of the European Central Bank and monetary union.

Accepted Answer

The Maastricht Treaty, which was signed in 1992, created the European Monetary Institute (EMI) as the forerunner of the European Central Bank (ECB) and laid the groundwork for the establishment of the European Monetary Union (EMU), which includes the adoption of a single currency, the euro. The European Monetary System (EMS) was a precursor to the EMI and was established in 1979. The European Currency Unit (ECU) was the precursor to the euro, but it was never a fully-fledged currency itself.

Question 12

Which of the following is one of the conditions that was set under the Maastricht Treaty and must be met before a nation could join the European Monetary Union?

Accepted Answer

One of the conditions set under the Maastricht Treaty was that the overall government debt of a nation should not exceed 60 percent of its GDP. Choice A is incorrect because it mentions an inflation rate criteria, which is not one of the conditions under the Maastricht Treaty. Choice B is incorrect because the budget surplus criteria states that it should not exceed 3 percent of GDP, which means having a budget surplus is allowed as long as it is within the limit. Choice D is incorrect because the average exchange rate criterion is not one of the conditions set under the Maastricht Treaty.

Question 13

What country tried to slow the negotiations of the monetary union in the European Monetary Union?

Accepted Answer

The United Kingdom was the country that tried to slow the negotiations of the monetary union in the European Monetary Union, as they were skeptical of relinquishing control over their own currency and monetary policy. They ultimately opted out of the monetary union and still use the British pound.

Question 14

A(n)______________ is a fixed exchange rate system where the band of allowed fluctuation is very narrow.

Accepted Answer

An adjustable peg system is a type of fixed exchange rate system where the currency's value is fixed to another currency or a basket of currencies but allows for adjustments or revaluations within a narrow band of fluctuation. This system provides some stability in exchange rates while allowing for minor adjustments in response to economic conditions.

Question 15

The institution of the European Monetary System that provides short-term and medium-term balance-of-payments assistance to member nations is known as:

Accepted Answer

The European Monetary Cooperation Fund (EMCF) is a part of the European Monetary System that provides short-term and medium-term balance-of-payments assistance to member nations. The other options listed are either outdated (European Currency Unit) or incorrect (European Assistance Fund, European Monetary Institute).

Question 16

The common currency adopted at the beginning of 1999 by eleven of the fifteen member countries of the European Union was known as:

Accepted Answer

The common currency adopted by eleven member countries of the European Union at the beginning of 1999 was the euro. The other options given, pound sterling and dollar, are the currencies of the United Kingdom and the United States respectively and were not adopted by the European Union. The European Currency Unit (ECU) was a basket of currencies used as the unit of account of the European Communities from 1979 to 1998, but it was replaced by the euro. Therefore, the correct answer is C, the euro.

Question 17

Which of the following does a nation sacrifice when dollarization takes place?

Accepted Answer

Dollarization involves giving up a nation's ability to conduct its own monetary policy, act as a lender of last resort, and collect seigniorage from independently issuing its own currency. Therefore, all of the above options are correct.

Question 18

How many members are in the European Monetary Union?

Accepted Answer

The European Monetary Union (EMU) consists of 19 European Union (EU) countries. However, not all of these countries have adopted the euro as their official currency. Only 12 countries have fully adopted the euro and are therefore considered members of the EMU. These countries are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Question 19

What system was created to avoid the disadvantage of relatively large changes in par values and possibly destabilizing speculation?

Accepted Answer

The crawling peg system was created to avoid the disadvantage of relatively large changes in par values and possibly destabilizing speculation. Under this system, a country's exchange rate is allowed to fluctuate within certain bands or margins against a specified reference currency or a basket of currencies. However, the central bank intervenes in the foreign exchange market to keep the exchange rate within these bands and adjusts the official par value of the currency periodically to reflect changes in economic fundamentals. This allows for gradual and smooth adjustments in the exchange rate, avoiding abrupt and disruptive changes.

Question 20

The system under which exchange rates or par values are periodically changed to correct balance-of-payments disequilibria is known as a(n):

Accepted Answer

The adjustable peg system refers to a fixed exchange rate regime where the par value of a currency is periodically adjusted in response to balance-of-payments imbalances. This system was popular during the Bretton Woods era, where currencies were pegged to the US dollar, which in turn was backed by gold. However, the system collapsed in 1971 when the US dollar was no longer convertible to gold, and countries shifted towards floating exchange rates.

Quiz 15: Flexible Versus Fixed Exchange Rates,european Monetary Systems,and Macroeconomic Policy Coordination