Euro Challenge Orientation Questions

Which concepts do you have to discuss in your overview of the Euro Area?

• GDP Growth

• 1. Unemployment

• 1. Inflation

• 1. Current monetary policy activities of the ECB 

• All of the above

Answer explanation

As per Part 1 of the Euro Challenge task, your discussion of the current economic situation of the Euro Area should cover GDP growth, unemployment, inflation, and the current monetary policy activities of the ECB.

What is the Euro Area (aka Eurozone)?

• 1. the geographic area of Europe

• 1. the 27 countries of the European Union

• 1. the 20 countries of the European Union that have adopted the euro as their national currency

Croatia joined the eurozone last January. What type of benefits does a country like Croatia gain from adopting the euro as its national currency?

• 1. the ease with which prices can be compared between countries, which boosts competition between businesses, thereby benefiting consumers

• 1. the prospect of price stability

• the euro makes it easier, cheaper and safer for businesses to buy and sell within the euro area and to trade with the rest of the world

• All of the above

Your policy recommendations to address your chosen challenge topic may include an increase in government spending on certain initiatives.  All else equal, what impact would this have on GDP growth?

• 1. It will increase GDP growth in the short-run.

• 1. It will lead to no change in GDP growth in the short-run.

• 1. It will reduce GDP growth in the short-run.

• 1. It is unclear what impact this would have. 

While deflation (an overall decrease in prices) sounds good to the ears, it is not necessarily a good thing for an economy. Why might this be?

•  Prices could be declining because there is not enough demand for all the goods and services being produced.

•  Prices could be declining because of households having less disposable income due to poor labor market conditions.

• A and B

• Neither A nor B

Answer explanation

If supply is greater than demand, prices will tend to fall. There is not enough consumption.
If labor market conditions are poor and unemployment is rising, more people are out of work and cutting back on their purchases of goods and services. If this happens, prices tend to fall. 

The takeaway from this is that deflation is likely a sign that something is not going well in the larger economy whether it be in the labor market, declining demand, or other areas.

Central banks attempt to manage inflation by raising and lowering interest rates. The European Central Bank (ECB) has an inflation target of about 2% for the Euro Area. If the actual rate of inflation in the Euro Area is 3% and the ECB wants to lower inflation to its 2% target, what should it do?

•  Lower interest rates

• Raise interest rates

• Raise Taxes

• Lower Taxes

Answer explanation

If the ECB raised interest rates, this would raise the cost of borrowing which would lead to less borrowing and less economic activity. This would tend to lower inflation.

Tax policy is an example of fiscal policy which the ECB is not in control of.

Based on the economic definition of unemployment (someone who is not employed and is actively looking for work), who is generally not considered to be unemployed?

• A full-time college student

• A retired teacher

• A teacher looking for work

• A and B

• A, B, and C

Answer explanation

There are lots of reasons why someone is not looking for work and therefore not considered to be unemployed. Being a full-time student in college is an example of this.

The key difference between the retired teacher in choice B and the teacher here in choice C, is that the teacher in choice C is looking for work. Therefore, the teacher in choice C is considered to be unemployed.