The primary objective of the ECB is to: A) promote economic growth. B) promote f
ID: 1114430 • Letter: T
Question
The primary objective of the ECB is to:
A) promote economic growth.
B) promote full employment.
C) foster an equitable distribution of income.
D) maintain price stability.
Which of the following is one of the convergence criteria that countries needed to satisfy to join the Eurozone?
A) 10 consecutive years in the ERM band without devaluation of its currency
B) a government deficit of no more than 25% of GDP in the previous year
C) total government debt of no more than 60% of GDP in the previous year
D) an inflation rate of 0% in the previous 10 consecutive years
Suppose that there are two countries (Ireland and Belgium) negotiating the government debt criteria for the Eurozone. Ireland has a high ratio of government debt to GDP; Belgium has a low ratio of debt to GDP. Which country is likely to prefer a higher inflation target?
A) Belgium, because the real value of its government debt will approach zero faster than Ireland's over time
B) Ireland, because higher inflation will cause larger absolute reductions in the real value of its government debt than in Belgium
C) It makes no difference because high rates of inflation will have proportional effects on the real debt of both countries.
D) both, because each wants to see its real government debt decline
Explanation / Answer
The primary objective of the ECB ( European Central Bank ) , as mentioned in Article 2 of the Statute of the ECB, is to maintain price stability within the Eurozone . So the answer is : D) maintain price stability.
Convergence criteria : C) total government debt of no more than 60% of GDP in the previous year
B) Ireland, because higher inflation will cause larger absolute reductions in the real value of its government debt than in Belgium
Real value depends on inflation rate , so this leads to larger reductions in real value of debt .
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