Essential facts of monetary integ.

Question 1

Until the end of the nineteenth century money was metallic and a large number of currencies circulated side by side. A) True B) False

Accepted Answer

A) True

Question 2

The first two European monetary unions, the Latin Monetary Union and the Scandinavian Monetary union were not only built on harmonized coinage, but also had a common central bank with clear coordination of national monetary authorities. A) True B) False

Accepted Answer

B) False

Question 3

Under Hume’s price-specie mechanism, a nation which purchases more imports than exports tends to accumulate gold. A) True B) False

Accepted Answer

B) False

Question 4

The Bretton Woods System retained gold as the ultimate source of value but the only currency directly tied to gold was the US dollar. A) True B) False

Accepted Answer

A) True

Question 5

After the demise of the Bretton Woods system, Continental Europe tried to build a regional exchange system, the snake. It failed due to a lack of clear rule and coherence. A) True B) False

Accepted Answer

A) True

Question 6

The ERM’s parity grid was A) a flexible Exchange Rate arrangement between all EMS countries, with the Deutschmark as the anchor currency. B) a basket of currencies of all EMS countries. C) a matrix like table collecting all pair wise central parities and their associated margins of fluctuation. D) a totally symmetric exchange rate arrangement where all ERM currencies were fixed to each other with a flexible band of fluctuation of plus or minus 20%.

Accepted Answer

C) a matrix like table collecting all pair wise central parities and their associated margins of fluctuation.

Question 7

Within the Eurozone, when one country runs a balance of payments surplus, it receives __________ of euros. A deficit country can no longer use __________ to re-establish competitiveness. A) inflows, the exchange rate B) inflows, trade barriers C) outflow, the capital account D) outflow, wage adjustments

Accepted Answer

A) inflows, the exchange rate

Question 8

Under the Bretton Woods system all currencies were defined in terms of the dollar; exchange rates were ___________; and a new institution, the ___________, was created and this provided financial support and oversaw national policies. A) pegged to the value of gold, World Bank B) fixed, EMS C) fixed but adjustable, IMF D) aligned, WTO

Accepted Answer

C) fixed but adjustable, IMF

Question 9

List the countries that joined the EMS in 1979. Belgium, Denmark, Ireland, Italy, Luxembourg, the Netherlands, West Germany.

Accepted Answer

Belgium, Denmark, Ireland, Italy, Luxembourg, the Netherlands, West Germany.

Question 10

Which European Council Meeting set a precise schedule for the establishment of monetary union?

Accepted Answer

Maastricht

Question 11

During the first ten years of the EMS, inflation rates diverged and realignments were chronic. To address this problem, European countries: A) pegged their currency to the DM, the largest member with the lowest rate of inflation. B) set a wide band of fluctuation within which currencies were to be aligned. C) pegged their currencies to the US$. D) abandoned the system and switched to floating rates.

Accepted Answer

A) pegged their currency to the DM, the largest member with the lowest rate of inflation.

Question 12

Within the Eurozone, a country cannot change its exchange rate to re-establish the competitiveness of its exports. Adjustments have to work through: A) inflation and interest rates. B) prices and wages. C) interest rates and budget deficits. D) labour markets and interest rates.

Accepted Answer

B) prices and wages.

Question 13

During the interwar period, different European countries attempted to resurrect the gold standard but failed. Two important lessons emerging fron this period are: A) preservation of the value of a currency on the foreign exchange is essential to dispel hyperinflation and ‘managed trade’ systems are important to protect industry during recessionary periods. B) undervalued currencies can help a nation escape recessions and rigid adherence to fixed exchange rate parities hurt national welfare. C) exchange rate misalignments breed trade barriers and rigid alliance to fixed exchange rate parities are difficult to maintain. D) exchange controls help stabilise the currencies and domestic policy misbehaviour saps fixed exchange rates.

Accepted Answer

C) exchange rate misalignments breed trade barriers and rigid alliance to fixed exchange rate parities are difficult to maintain.

Question 14

Under Hume’s price-specie mechanism an accumulation of gold in the home country leads to: A) higher trade barriers B) a recession in foreign countries. C) debasement of the currency. D) higher prices in the home country.

Accepted Answer

D) higher prices in the home country.

Question 15

The automaticity under Hume’s mechanism requires: A) central bank independence, neutrality of money and paper money. B) full gold convertability at fixed price, full backing of banknotes, and complete freedom of trade and capital movements. C) gold coins in all countries, free movement of labour and common language. D) full gold convertability of banknotes, free movement of labour and neutrality of money.

Accepted Answer

B) full gold convertability at fixed price, full backing of banknotes, and complete freedom of trade and capital movements.

Question 16

The 1978 EMS agreement was explicitly symmetric, without any central currency. A) True B) False

Accepted Answer

A) True

Question 17

The EMS-2 system is more flexible and less committal than EMS-1: the margins of fluctuation are less precisely defined and interventions, though still automatic and unlimited, may be suspended by the ECB. A) True B) False

Accepted Answer

A) True

Question 18

The consensus rule in the ERM stipulated that any change in any bilateral exchange rate had to be jointly decided by all members. A) True B) False

Accepted Answer

A) True

Question 19

The EMS agreement established two arrangements, the _________ to which all European Community countries were de facto members and the ________, an optional scheme. A) European Monetary Union (EMU), EMS-2 B) European Monetary System (EMS), Exchange Rate Mechanism (ERM) C) European Currency Unit (ECU), Exchange Rate Mechanims (ERM) D) EMS-2, European Currency Unit (ECU)

Accepted Answer

B) European Monetary System (EMS), Exchange Rate Mechanism (ERM)

Question 20

Because of _________ and chronic _________ for high inflation countries, all EMS members decided to adopt the _______ as an anchor and thus avoid further realignments. A) high inflation, trade deficits, DM B) high unemployment, current account deficits, 'franc fort' C) high inflation, external deficits, 'franc fort' D) speculative crises, external deficits, DM

Accepted Answer

D) speculative crises, external deficits, DM

Question 21

While EMS-1 was a symmetric system based on a grid of bilateral parities, in the EMS-2 the parities were defined vis a vis _________. A) the US$ B) a basket of currencies C) the Euro D) the DM

Accepted Answer

C) the Euro

Question 22

When and by whom was the decision taken to create the EMS?

Accepted Answer

By German Chancellor Helmut Schmidt and French President Valery Giscard D'Estaing in 1978.

Question 23

What precondition for joining the EMU is set by the Maastricht Treaty?

Accepted Answer

Membership of the ERM for at least 2 years.

Question 24

The adoption of the euro in January 1999 was accompanied by the launch of which instrument?

Accepted Answer

EMS-2

Question 25

The crisis of 1993 was onset by: A) an ongoing loss of competitiveness for high inflation countries, German unification and slow global growth. B) the oil price rise shock. C) war in the Middle East. D) devaluation of the US$.

Accepted Answer

A) an ongoing loss of competitiveness for high inflation countries, German unification and slow global growth.

Question 26

The mutual support principle central to the EMS agreements stipulated that: A) bilateral exchange rates had to be jointly decided by all members. B) countries shared equally the responsibility to maintain each bilateral exchange rate within its margin. C) strong currencies should intervene on the foreign exchange market to support weaker currencies. D) central banks should bargain with member states to realign currencies within the agreed upon margins

Accepted Answer

B) countries shared equally the responsibility to maintain each bilateral exchange rate within its margin.

Question 27

The first country to undertake ratification of the Maastricht Treaty was Denmark and Danish people chose to reject the Treaty. A) True B) False

Accepted Answer

A) True

Question 28

One of the two main lessons learned from the period of floating exchange rates after collapse of the gold standard were that floating exchange rates cannot be manipulated. A) True B) False

Accepted Answer

B) False

Question 29

The maximum possible fluctuation of non-dollar currencies vis-à-vis each other under the snake (last part) was: A) 1% B) 2.25% C) 9 % D) 15%

Accepted Answer

C) 9 %

Question 30

The ___________ European Council Meeting set a precise schedule for the establishment of monetary union.

Accepted Answer

Maastricht

Question 31

In the period between the Maastricht Treaty and the coming into force of the EMU, Germany pushed for introducing the EMU for only a small number of Member States. A) True B) False

Accepted Answer

A) True

Question 32

The 2010 debt crisis of the EMU led to at least five innovations that were decided with an unprecedented speed and decisiveness. Those were the creation of the Troijka, reduction of Greek debt, ___________, the new treaty to oversight national budgets and the decision to have the ECB to use indefinite resources to quiet down the panic on the financial markets. A) A political union B) A tax on financial transactions C) the banking union D) reduction of Portuguese, Spanish and Irish debt.

Accepted Answer

C) the banking union

European Integration 2 (Subject) / Essential facts of monetary integ. (Lesson)