- The issues and policy decisions surrounding German unification
are clearly identified by means of the Mundell-Fleming model.
- Enjoying the freedom of the nth __________ in the EMS, the
Bundesbank decided to fight potential inflation, confronting other
EMS members with high __________ _______ .
- High __________ __________ meant lower aggregate __________
for other EMS members. This was likely to be least acceptable
for those countries already in deep __________ . In 1992 this
made _______________ the candidate most likely to be the first
to suspend membership.
- Exchange rates respond in a less volatile manner to observed
changes in economic fundamentals if the _______________ is expected
to intervene in the foreign exchange market in a stabilizing fashion.
- A _________ zone like the EMS obliges central banks to intervene
when the bounds are hit.
- 'Market psychology', in the sense that speculators spot weaknesses
detached from fundamentals, affects exchange rates that are flexible
or operate within a band. Therefore irrational speculation may
well start an EMS _______ . However, the widely held view that
speculation against the pound and the lira during the 1992 crisis
was not warranted by __________ is not supported by how these
two currencies fared after __________ in the EMS had been suspended.
- Policy issues in a _______ union can be analyzed within two-country
version of the Mundell-Fleming model.
- The _______ ________ _______ controls the money supply in the
euro area. It _______ control the money supply in individual member
countries - very much like the Bank of England cannot control
the money supply in Essex, London or the Midlands. Therefore,
_______ policy in a currency union affects all members in the
- Expansionary _______ policy by one member of a currency union
has _______ effects on the other members in the short run, and
on the entire union in the longer run.
- Rules as set out in the Stability and Growth Pact, or no-bailout
clauses may prevent such policies or dampen their negative effects on
others to the extent that they are enforced and credible.