The European Union: Structure and Function
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Questions and Answers

What is the primary goal of better supervision in fiscal integration?

  • To reduce government spending.
  • To build fiscal buffers and address common concerns. (correct)
  • To eliminate the need for public services.
  • To ensure compliance with international trade rules.

    • Which of the following is a potential element of fiscal integration to manage a crisis?

  • Creation of euro zone wide backstops for the banking sector. (correct)
  • Decentralization of fiscal policies.
  • Implementation of uniform tax rates across all countries.
  • Elimination of public services to reduce costs.

    • What aspect of fiscal accountability is emphasized for effective supervision?

  • Fiscal independence from national courts.
  • Public approval for all budgetary decisions.
  • Establishment of independent Fiscal Councils. (correct)
  • Decisions made primarily by local governments.

    • What would a system of temporary transfers organized by a central budget help to address?

    <p>Long-term economic stability of all participating countries.</p> Signup and view all the answers

    What is a challenge to political accountability in increased fiscal integration?

    <p>Central decision-making raising questions of democratic governance.</p> Signup and view all the answers

    Why is the common issuance of public bonds suggested as an element of fiscal integration?

    <p>To reduce disparities between country-specific bond yields.</p> Signup and view all the answers

    What is a recommended structural fiscal target in fiscal policy design?

    <p>Structural fiscal targets instead of headline targets.</p> Signup and view all the answers

    What would be necessary for existing fiscal rules to be more effective?

    <p>Inclusion of fiscal rules in national laws enforced by courts.</p> Signup and view all the answers

    What is a significant disadvantage of adopting the Euro?

    <p>Loss of monetary policy</p> Signup and view all the answers

    What does the Theory of Optimal Currency Areas suggest should be a primary consideration in determining a currency's geographical coverage?

    <p>Integration in the trade of goods and services</p> Signup and view all the answers

    What is the primary focus of the European Union as a political entity?

    <p>Creating a supranational political, economic, and monetary union.</p> Signup and view all the answers

    Which of the following factors enhances risk-sharing in the context of negative economic shocks in the USA?

    <p>Federal fiscal transfers</p> Signup and view all the answers

    What principle dictates that the EU should only act where member states cannot achieve objectives alone?

    <p>Subsidiarity.</p> Signup and view all the answers

    What is one potential consequence of a country facing a negative asymmetric shock when using the Euro?

    <p>Limited fiscal policy options</p> Signup and view all the answers

    Which of the following statements correctly describes the customs union of the EU?

    <p>It applies a common external tariff on goods entering the single market.</p> Signup and view all the answers

    What is a major advantage of using the Euro for member countries?

    <p>Reduction in exchange rate uncertainty</p> Signup and view all the answers

    How does factor mobility impact states in the USA facing economic difficulties?

    <p>It allows labor and capital to move and mitigate shocks</p> Signup and view all the answers

    How many sovereign states are currently part of the EU?

    <ol start="27"> <li></li> </ol> Signup and view all the answers

    What is one effect of adopting the Euro on budgetary discipline in member countries?

    <p>Stricter adherence to budgetary constraints</p> Signup and view all the answers

    What is NOT one of the main decision bodies of the EU?

    <p>European Economic Area.</p> Signup and view all the answers

    Which of the following principles ensures that the EU acts within the limits of its established competencies?

    <p>Conferral.</p> Signup and view all the answers

    What is a characteristic feature of monetary policy under the Eurozone system?

    <p>Centralized decision-making by European Central Bank</p> Signup and view all the answers

    Which of the following is a feature of the EU's single market?

    <p>Free movement of goods, services, capital, and people.</p> Signup and view all the answers

    Which countries are part of the European Free Trade Agreement (EFTA)?

    <p>Norway, Switzerland, Iceland, and Liechtenstein.</p> Signup and view all the answers

    What is one of the primary benefits of having a Rainy Day Fund?

    <p>It offers insurance against idiosyncratic shocks.</p> Signup and view all the answers

    What is a significant challenge associated with activating transfers from the Rainy Day Fund?

    <p>Detecting the events warranting activation.</p> Signup and view all the answers

    What does the concept of Common Unemployment Insurance aim to address?

    <p>Income risk across member states.</p> Signup and view all the answers

    What is a downside of implementing Common Unemployment Insurance?

    <p>A focus on long-term unemployment benefits.</p> Signup and view all the answers

    How much should the Rainy Day Fund ideally collect in revenues from Euro Area members?

    <p>1.5% to 2.5% of GDP</p> Signup and view all the answers

    Which of the following can be considered a pro of the Rainy Day Fund?

    <p>It provides ex-ante support before funding crises.</p> Signup and view all the answers

    What is a potential risk associated with the collective management of transfers like the Rainy Day Fund?

    <p>'Free-riding' behavior by member states.</p> Signup and view all the answers

    Which statement best describes a feature of a Common Unemployment Insurance system?

    <p>It would require harmonization of labor market arrangements.</p> Signup and view all the answers

    What is one potential benefit of a Euro Area Budget?

    <p>It would facilitate the coordination of fiscal policy.</p> Signup and view all the answers

    In a Transfer Union, which of the following statements is true?

    <p>Typically, the transfers result from fiscal decisions regarding G, TR, and t.</p> Signup and view all the answers

    What does risk sharing in the context of fiscal integration typically involve?

    <p>Fiscal transfers to assist territories with negative shocks.</p> Signup and view all the answers

    What is a potential drawback of implementing a Euro Area Budget?

    <p>It leads to greater centralization of fiscal responsibilities.</p> Signup and view all the answers

    How might a Fund for risk sharing be established?

    <p>It requires all territories to agree to contribute in prosperous times.</p> Signup and view all the answers

    What is the relationship between National Income (NI) and Gross National Product (GNP)?

    <p>NI is calculated by subtracting depreciation, indirect taxes, and adding subsidies to GNP.</p> Signup and view all the answers

    Which factor primarily affects GDP in the short term?

    <p>Aggregate Demand.</p> Signup and view all the answers

    How is Aggregate Expenditure calculated?

    <p>GDP = C + I + G + NX.</p> Signup and view all the answers

    What defines Private Saving?

    <p>The amount of disposable income not consumed.</p> Signup and view all the answers

    What is meant by 'Value Added' in the context of GDP?

    <p>Value of sales minus costs of intermediate goods.</p> Signup and view all the answers

    According to the expenditure approach, what components are included in GDP?

    <p>Value added from services and manufacturing sectors.</p> Signup and view all the answers

    What primarily determines GDP in the long term?

    <p>The evolution of production capacities and technological changes.</p> Signup and view all the answers

    What does the production approach to GDP emphasize?

    <p>The 'value-added' at each production stage.</p> Signup and view all the answers

    What does a current account deficit combined with a financial account surplus typically indicate about a country's economy?

    <p>The country is accumulating external debt.</p> Signup and view all the answers

    In the identity S=I, what does 'S' represent when external factors are not considered?

    <p>Total savings</p> Signup and view all the answers

    What is a consequence of a large public deficit on private investment according to the identities discussed?

    <p>It reduces the capacity for private investment.</p> Signup and view all the answers

    What does a current account surplus allow for regarding the financial account?

    <p>It leads to a surplus in the financial account.</p> Signup and view all the answers

    What does the balance of payments equilibrium imply regarding the relationship between current and financial accounts?

    <p>Current account surplus matches the financial account deficit.</p> Signup and view all the answers

    Which of the following scenarios describes a country becoming an external creditor?

    <p>When it has a financial account surplus.</p> Signup and view all the answers

    What does a country experience if it continually maintains a current account deficit without adequate capital inflows?

    <p>Accumulation of significant external debt.</p> Signup and view all the answers

    Which of the following statements about savings and investments in an economy is true when considering the public sector?

    <p>S=I+Public Deficit illustrates the balance between savings, investments, and public deficits.</p> Signup and view all the answers

    What is the relationship between public deficit and private investment?

    <p>A greater public deficit leads to smaller private investment.</p> Signup and view all the answers

    Which of the following accurately describes the unemployment rate calculation?

    <p>It is calculated by dividing the unemployed by the labor force.</p> Signup and view all the answers

    What is the purpose of the primary budget deficit?

    <p>To indicate government revenues exceeding expenditures without interest.</p> Signup and view all the answers

    How is labor force participation rate defined?

    <p>As the labor force divided by the total population of working age.</p> Signup and view all the answers

    Which is NOT a function of government in the public sector?

    <p>Ensure maximal profits for private companies.</p> Signup and view all the answers

    What does a public budget balance greater than zero indicate?

    <p>A budget surplus.</p> Signup and view all the answers

    What characterizes discouraged workers in the labor force?

    <p>They have given up looking for work.</p> Signup and view all the answers

    Which of the following is included in public sector revenues?

    <p>Indirect taxes like VAT.</p> Signup and view all the answers

    What does a CA surplus indicate about the country's financial position with other nations?

    <p>The country is a net lender to other countries.</p> Signup and view all the answers

    What is the net effect of direct investments when liabilities increase by 20 and assets increase by 27?

    <p>The country is increasing its net foreign assets by 7.</p> Signup and view all the answers

    What does a negative balance in trade indicate regarding imports and exports?

    <p>Imports are greater than exports.</p> Signup and view all the answers

    What does a balance of payments deficit typically signal for an economy's foreign exchange reserves?

    <p>Expenditure on imports exceeds revenue from exports.</p> Signup and view all the answers

    What does investment income primarily reflect in the current account?

    <p>Net income earned by domestic citizens from foreign assets.</p> Signup and view all the answers

    How does an increase in foreign reserves valued at 11 units of domestic currency affect the country's balance of payments?

    <p>It signifies the country is financing imports from other countries.</p> Signup and view all the answers

    Which category shows a complete balance of zero in the current account?

    <p>Transfers.</p> Signup and view all the answers

    What does balanced trade in services suggest about the country's earnings and expenditures in this sector?

    <p>Earnings from services equal expenditures.</p> Signup and view all the answers

    How does a surplus from direct investments affect a country's financial account?

    <p>It reflects an increase in foreign liabilities.</p> Signup and view all the answers

    What can be inferred if the overall change in portfolio investments is negative by 3, and what this indicates about the behavior of domestic citizens and foreigners?

    <p>Domestic citizens are investing more abroad than foreigners in the home country.</p> Signup and view all the answers

    What does a negative balance in portfolio investments suggest?

    <p>Domestic citizens are buying more foreign investments than foreigners are buying domestically.</p> Signup and view all the answers

    What does the absence of transfers indicate about the flow of financial resources in this context?

    <p>There are no remittances or gifts affecting the balance.</p> Signup and view all the answers

    What accounts for the financing of a current account deficit according to investment income?

    <p>Net income earned by domestic citizens in previous periods.</p> Signup and view all the answers

    What does a conclusion of 'the country imports assets from abroad' imply about the country’s financial activities?

    <p>The country is using its resources to invest abroad more than it receives.</p> Signup and view all the answers

    What does the change in reserve assets indicate?

    <p>A central bank's sale of foreign reserves.</p> Signup and view all the answers

    In the financial account, what does an increase in foreign liabilities reflect?

    <p>Increased foreign investment in the country.</p> Signup and view all the answers

    Study Notes

    The European Union

    • The EU is a supranational political, economic and monetary union of 27 sovereign states.
    • Established in 1993, the EU's single market facilitates the free movement of goods and services.
    • The EU functions as a Customs Union, applying a common external tariff on goods entering the single market.
    • The EU operates through a system of supranational and intergovernmental decision-making institutions, adhering to principles of conferral and subsidiarity.
    • The EU operates through a series of decision-making bodies.
    • The EU has a common currency, the Euro.

    Economic Union

    • Established in 1993, it promotes the free movement of goods and services within the EU.
    • It includes a Customs Union where a common external tariff is applied to goods entering the single market.
    • Goods within the single market experience no customs duties, discriminatory taxes, or import quotas.

    Political Union

    • The EU functions through a combination of supranational and intergovernmental decision-making bodies.
    • Decision-making is governed by the principles of conferral and subsidiarity.
    • Conferral refers to the EU acting only within the limits of its delegated powers.
    • Subsidiarity implies the EU intervenes only when an objective cannot be adequately achieved by individual member states.

    The Euro

    • The Euro was introduced as a common currency for many EU member states.
    • It offers advantages like the elimination of exchange rate uncertainty and transaction costs.
    • It promotes economic and financial integration within the Eurozone.
    • It provides a framework for greater budgetary discipline among members.
    • The Euro presents potential disadvantages including the loss of monetary and exchange rate policies, restricted fiscal options, and potential asymmetric shocks.

    The Theory of Optimal Currency Areas

    • This theory explores the factors determining the optimal geographical scope of a currency area.
    • Introduced by Robert Mundell, it highlights a first condition, which is integration in the trade of goods and services.
    • It emphasizes the importance of shared economic cycles, flexible labor markets, and fiscal integration.

    Fiscal Integration

    • Fiscal Integration is a crucial aspect of managing a currency area effectively.
    • Fiscal integration can be achieved with better supervision, temporary transfers, and provisions of public services.
    • In essence, fiscal integration involves creating mechanisms for sharing resources and risks among member states.
    • The establishment of a rainy day fund, a common unemployment insurance system, or a Euro area budget are different approaches to enacting fiscal integration.

    Risk Sharing.

    • The concept of risk sharing centers on the principle of assisting member states experiencing negative asymmetric shocks.
    • This can be achieved through fiscal transfers from member states, a central government, or through the creation of a dedicated fund.

    Centralized Budgets and Automatic Transfers

    • A central government, or a central fiscal authority, creates a centralized budget, enabling the redistribution of resources.
    • Although automatic, the central authority has the power to adjust transfers based on fiscal priorities and economic conditions.
    • The central authority can also provide public services through a centralized budget, which can also function as a risk-sharing mechanism.

    The Transfer Union

    • The Transfer Union promotes the equalization of public service quality and living standards across different territories.
    • This is accomplished by fiscal transfers from richer territories to those experiencing economic challenges.
    • The Transfer Union acts through a central government or a central fiscal authority.

    The Role of Central Governments

    • Central governments play an important role in facilitating risk sharing within a currency area.
    • This can be achieved through fiscal adjustments to government spending, taxation, or through the creation of dedicated funds.
    • Central governments can use budgetary tools to redistribute resources and mitigate economic shocks.

    National Income

    • National Income (NI) = Gross National Product (GNP) - Depreciation of capital (K) - Indirect Taxes + Subsidies

    Origin of Income

    • Labor: salary, wages, payments in kind
    • Capital: profits, dividends, interest
    • Land: rental income, capital gains

    Disposable Income

    • Disposable Income = NI - Direct Taxes + Public Sector Transfers to Families
    • Disposable Income (Yd) = Consumption (C) + Savings (S)
    • Private saving is the portion of disposable income not consumed

    Aggregate Expenditure

    • Gross Domestic Product (GDP) = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (NX)

    GDP - Expenditure Approach

    • GDP can be calculated by summing up all spending on final goods and services in an economy

    Aggregate Supply and Demand

    • GDP depends on the evolution of demand components in the short term
    • GDP depends on the evolution of supply conditions in the long term, including: technological innovations, productivity of labor, and capital.

    GDP Trend

    • GDP trend can be observed over time
    • GDP growth is influenced by both aggregate demand and long-term supply factors
    • The short-term trend is driven by fluctuations in aggregate demand (C + I + G + NX)
    • The long-term trend is driven by the ability to produce goods and services (productivity)

    Value Added

    • Value Added = Value of sales - Cost of embedded intermediate goods
    • It measures the contribution of capital and labor to production
    • GDP is equivalent to the sum of value added, earned incomes, and total expenditures

    Balance of Payments (BOP)

    • Measures all economic transactions between a country and the rest of the world
    • BOP can be in surplus or deficit
    • Surplus: Foreign exchange reserves increase
    • Deficit: Foreign exchange reserves decrease
    • Ideally, a country should have a stable BOP balance

    BOP Balance Types

    • Current account deficit can be offset by a financial account surplus - typical of developing economies
    • Current account surplus allows for a financial account deficit - typical of developed economies and export-driven developing economies

    BOP Equilibrium

    • BOP equilibrium occurs when the current account balance plus the financial account balance (including changes in foreign exchange reserves) equals zero

    Current Account Deficit

    • Exports less than imports
    • Financial Account Surplus: inflow of capital (loans received from the rest of the world)
    • Leads to the accumulation of external debt

    Current Account Surplus

    • Exports greater than imports
    • Financial Account Deficit: outflow of capital (loans to the rest of the world)
    • Leads to the country becoming an external creditor

    Global Current Account Imbalances

    • Different countries have varying current account balances
    • These imbalances can reflect economic structures, trade patterns, and investment flows

    Important Identities

    • Identity 1 (without external sector): Savings (S) = Investment (I)
    • Identity 2 (without external sector): Savings (S) = Investment (I) + Public Deficit
    • Identity 3 (with external sector): Savings (S) = Investment (I) + Public Deficit + Current Account Balance OR Savings (S) + Financial Account Balance = Investment (I) + Public Deficit

    Unemployment

    • Labor Force: people who are of working age and are looking for a job
    • Employed: people who have a job
    • Unemployed: people who do not have a job and are looking for one
    • Unemployment Rate = (Unemployed / Labor Force) x 100

    Labor Force Participation Rate

    • Labor Force Participation Rate = (Labor Force / Population of working age) x 100
    • Only those looking for work are counted as unemployed
    • People not working and not looking for work are not part of the labor force
    • Discouraged workers are those without jobs who give up looking for work

    The Public Sector

    • The government plays a vital role in the economy

    Functions of Government:

    • Preserve market competition
    • Regulate monopolies, mergers, and acquisitions
    • Correct market failures
    • Provide public goods, correct externalities
    • Redistribute wealth to ensure a more equitable society
    • Fight recessions
    • Steer the economy in the long run through investments in strategic sectors and basic research

    Public Budget

    • A record of all revenues and expenditures of the public sector
    • Revenues: taxes (direct and indirect)
    • Direct taxes: income tax
    • Indirect taxes: VAT, corporate taxes
    • Expenditures: Public spending (including public investment) and transfers to the private sector

    Public Budget Balance

    • Public Budget Balance: Revenues - Expenditures
    • Surplus: Balance > 0
    • Deficit: Balance < 0
    • Primary Budget Deficit: Public Budget Deficit excluding interest payments on public debt

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    Description

    Explore the intricacies of the European Union, a unique political and economic entity established in 1993. This quiz covers the EU's role as a Customs Union, its decision-making bodies, and the implications of the Euro as a common currency. Test your knowledge on the principles that govern this supranational organization!

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