Economics MCQs

Page No. 285

Which of the following is a problem for fiscal policy in a currency union ?


aThe central bank controls interest rates on long-term bonds issued by the governments of the member countries of the currency union

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b Government of the member countries of the currency union may run large budget deficit and so crowd out private investment

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c government of the member countries of the currency union may run large budget deficits and so impose costs on other countries by pushing up interest rates on the bonds these countries governments issue

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dIt is difficult to raise enough tax revenue to pay for the operation of the currency union

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View Answer government of the member countries of the currency union may run large budget deficits and so impose costs on other countries by pushing up interest rates on the bonds these countries governments issue

What is fiscal federalism ?


a A fiscal system for a group of countries in which fiscal policy is set in a treaty signed by all the countries

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b A fiscal system for a group of countries in which government budget deficits are strictly limited

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c A fiscal system for a group of countries involving a common fiscal budget and a system of taxes and fiscal transfers across countries

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dA fiscal system in which fiscal policy is jointly determined by local and national politicians

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View Answer A fiscal system for a group of countries involving a common fiscal budget and a system of taxes and fiscal transfers across countries

Which one of the following is not a characteristic that reduces the cost of a signals currency ?


aA high degree of labour mobility among the countries of the common currency area

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bA high degree of capital mobility among the countries of the common currency area

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cNone of the characteristics described in these answers They are all characteristics that reduce the cost of a single currency

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dA high degree of trade integration among the countries of the common currency area

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View Answer A high degree of trade integration among the countries of the common currency area

Which of the following could not be described as an asymmetric macroeconomic shock ?


aNone of these answers All of them are asymmetric macroeconomic shocks

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b A sudden and substantial fall in the worldwide demand for French wine

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cAn epidemic of an animal disease in a country that significantly reduces the country’s agricultural output

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d A sudden and substantial rise in prices on the world oil market

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View Answer A sudden and substantial rise in prices on the world oil market

Which one of the following is not an argument in support of the UK joining the EMU ?


aNone of these arguments they are all arguments in support of the UK joining the UMU

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bThe characteristics of the UK housing market make UK consumers expenditure very sensitive to changes in interest rates

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cThe UK risks exclusion from the Euroland capital market with damaging consequences with damaging

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d The UK needs to be a member of the EMU in order to continue to attract such large share of foreign direct investment in EU countries

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View Answer The characteristics of the UK housing market make UK consumers expenditure very sensitive to changes in interest rates

To try to overcome the free rider problem, the members of EMU signed ?


athe stability and growth pack

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bthe European solidarity packs

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c the exchange rate mechanism pact

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dthe responsibility and growth pack

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View Answer the stability and growth pack

How does the eurozone compare with USA as a possible optimal currency area (OCA) ?


aThe eurozone has a higher degree of labour mobility than the USA and labour law is much less restrictive in the erozone than in the USA On these measures the eurozone is more likely to be an OCA than is the USA

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bThe eurozone has a lower degree of labour mobility than the USA and labour law is much more restrictive in the erozone than in the USA On these measures the eurozone is less likely to be an OCA than is the USA

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cThe eurozone has a higher degree of labour mobility than the USA but labour law is much more restrictive in the erozone than in the USA On these measures it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA

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dThe eurozone has a lower degree of labour mobility than the USA and labour law is much less restrictive in the erozone than in the USA On these measures it is hard to judge whether the eurozone is more or less likely to be an OCA than is the USA

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View Answer The eurozone has a lower degree of labour mobility than the USA and labour law is much more restrictive in the erozone than in the USA On these measures the eurozone is less likely to be an OCA than is the USA

A high degree of real wage flexibility will tend to reduce the cost to a country of joining a currency union because ?


aAll of the reasons given in these answers are correct

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breal wages fall rapidly in a recession and the economy moves quickly back to long run equilibrium so limiting the duration of the recession even when exchange rate adjustment is not possible

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c workers will move from a country in which aggregate demand falls to other countries of the currency union, and so unemployment remains lower than it otherwise would

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dreal wages fall and so offset the inflationary effect of switching from the old currency to the new common currency

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View Answer real wages fall rapidly in a recession and the economy moves quickly back to long run equilibrium so limiting the duration of the recession even when exchange rate adjustment is not possible

If two countries A and B are member of a currency union and there is a shift in consumer preferences away from the goods of country A and towards those of country B than which one of the following would help to offset the effect of the resulting changes in aggregate demand in A and B on inflation and unemployment in the tow countries ?


aA high degree of labour mobility between the tow countries

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bAn increase in government spending in country (A)

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cA depreciation in the foreign exchange value of the common currency

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d A low degree of capital mobility between the two countries

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View Answer A high degree of labour mobility between the tow countries

Under financial repression ?


a banks engage in non-price rationing of loans

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bbanks face pressure for loans to those with political connections

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cbanks charge a high premium on foreign investments

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dA , B and C

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View Answer A , B and C

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