chapter 2

The Maastricht Treaty established convergence criteria for joining the euro. Which of the following was NOT an original criterion?

• A) The government deficit must be less than 3% of GDP

• B) Public debt must be less than 60% of GDP (or declining towards it)

• C) The trade balance of a country must be positive for two consecutive years

• D) Long-term interest rates must not exceed by more than 2 percentage points the average of the three countries with the lowest inflation

Under the interest rate parity (IRP) condition, what would happen if the domestic interest rate is lower than the foreign interest rate, assuming capital mobility and a floating exchange rate?

• A) Capital will flow into the domestic country, leading to an appreciation of the domestic currency

• B) Capital will flow out of the domestic country, leading to a depreciation of the domestic currency

• C) The central bank must intervene to maintain the independence of monetary policy

• D) The exchange rate remains stable due to purchasing power parity

The crisis of the European Monetary System (EMS) from 1992-1993 demonstrated which of the following key weaknesses?

• A) The inability to maintain fixed exchange rates in the presence of unrestricted capital mobility

• B) The failure of monetary unification in Europe due to differing inflation rates

• C) The lack of a lender of last resort within the EMS

• D) The excessive dependence on American monetary policy to stabilize European currencies

Which of the following was a major reason why some countries (for example, the United Kingdom and Denmark) chose not to adopt the euro despite being EU members?

• A) Concerns about the lack of independence of the European Central Bank's monetary policy

• B) A belief that the Maastricht convergence criteria were too lax and led to financial instability

• C) The desire to maintain control over domestic monetary policy in response to asymmetric shocks

• D) Their economies were not sufficiently open to international trade

The Maastricht Treaty formalized the no-bailout clause for countries in the eurozone. What was the economic justification behind this rule?

• A) To prevent countries from excessively accumulating debts, knowing that they could rely on other EU members for financial support

• B) To ensure that the European Central Bank has total control over national fiscal policies

• C) To prevent misalignments of exchange rates within the European Monetary System

• D) To allow member states to maintain independent monetary policies in times of crisis

Which of the following best describes the concept of an Optimum Currency Area (OCA)?

• A region where economic policies are fully controlled by a central bank

• A group of countries where using a single currency minimizes economic costs and maximizes benefits

• A monetary system where each country maintains independent currencies but follows a common exchange rate

• A theory that states every country should have its own currency

What is the ‘Impossible Trinity’?

• A country cannot have full capital mobility, fixed exchange rates, and an independent monetary policy simultaneously

• A country cannot have full capital mobility, flexible exchange rates, and an independent monetary policy simultaneously

• A country cannot have capital controls, fixed exchange rates, and an independent monetary policy simultaneously

• A country cannot have full capital mobility, fixed exchange rates, and an independent central bank simultaneously

Based on the Optimum Currency Area (OCA) criteria, which one is the most fulfilled within the Eurozone?

• Labor mobility

• Fiscal transfers

• Openness to trade

• Homogeneous preferences