Question

1. An advantage of the European Monetary Union (Eurozone) is that its member countries have common fiscal policies.

a. True b. False

1b.

As new regional trading arrangements are formed, the opportunity cost of remaining outside

a. decreases.

b. either increases or decreases.

c. increases.

d. neither increases nor decreases.

1c. A free trade area is like a customs union EXCEPT its members adopt a common external tariff structure.

a. True b. False

1d.

World welfare under a customs union

a. increases because of a trade diversion effect.

b. increases because of a trade creation effect.

c. decreases because of a trade creation effect.

d. is not affected by the trade creation and the trade diversion effects.

Answer 1

1.

The Economic and Monetary Union (EMU) represents a major step in the integration of EU economies. Eurozone involves the coordination of economic and fiscal policies, a common monetary policy, and a common currency, the euro.

TRUE

1.b

Opportunity cost is an implicit cost which is the cost of the best forgone alternative.

As new regional trading arrangements are formed, remaining outside is not profitable and hence the opportunity cost of remaining outside increases since it is now a costlier alternative.

Correct Ans - C

1.c.

The major difference between a customs union and a free trade area is that in a free trade area there is no common external tariff imposed.

FALSE

1.d.

The formation of a customs union will increase the welfare of its members, as well as the rest of the world, if the trade creation effect is larger than the trade diversion effect.

Hence welfare increases if trade creation increases or trade diversion decreases.

Correct Ans - B