Chapter 12 Summary
  • 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 same way.
  • 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.

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