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Suppose that applying for membership in the European Monetary Union (EMU) is expensive, so three hypothetical countries, Baltia, Polsha, and Atlantida, have come to you with their relevant data and want advice on if they should apply to join the EMU. Suppose that the average inflation rate of the three European countries with the lowest inflation rates is 3.0%, and the average long-term interest rate of those countries is 3.2%.
Evaluate the characteristics of Baltia, Polsha, and Atlantida presented in the following table using the Maastricht convergence criteria. Then, complete the bottom row by identifying whether each country is eligible to become an EMU member.
Criteria Baltia Polsha Atlantida
Inflation 4.5% 4.0% 4.1%
Long-term interest rates 5.0% 4.0% 3.0%
Exchange rates Last devaluated three years ago Stable Stable
Budget deficit 2.4% of GDP 3% of GDP 2.1% of GDP
Debt outstanding 45% of GDP 45% of GDP 46% of GDP
Qualifies to enter the EMU ? ? ?

Respuesta :

anthougo

Answer:

European Monetary Union Membership

All three countries are eligible to enter into the European Monetary Union, having met all the Maastricht convergence criteria.

Note that Baltia devalued its currency in the last three years and not two as set by the exchange rate criterion.

Explanation:

a) Maastricht convergence criteria are:

1. Price stability: the inflation rate not more than 1.5 point of average best three.

2. Deficit not more than 3% of GDP.

3. Government debt must not exceed 60% of GDP.

4. Exchange rate: No currency devaluation in last two years.

5. Long-term interest rates: not more than 2% higher than those of the three best performing Member states in terms of price stability.

b)  The Maastricht Convergence Criteria Performances:

Criteria                             Baltia         Polsha           Atlantida

Inflation                             4.5%            4.0%                4.1%

Long-term interest rates 5.0%            4.0%                3.0%

Exchange rates     Last devalued      Stable            Stable

                               3 years ago

Budget deficit                2.4% of GDP   3% of GDP     2.1% of GDP

Debt outstanding        45% of GDP    45% of GDP   46% of GDP

Qualifies to enter

the EMU                          ?                    ?                     ?

c)  The Maastricht Convergence Criteria Matching:

Criteria                             Baltia         Polsha           Atlantida     Decision

Inflation                             4.5%            4.0%                4.1%        

Lowest EU inflation rates 3.0%           3.0%                3.0%

Difference                          1.5              1.0                    1.1           Met

Maastricht criteria              1.5              1.5                    1.5    

Long-term interest rates 5.0%            4.0%                3.0%

Highest EU rates              3.2%            3.2%                3.2%

Difference                         1.8                0.8                  -0.2      Met

Maastricht criteria            2%                2%                   2%

Exchange rates     Last devalued      Stable            Stable     Met

                               3 years ago

Budget deficit            2.4% of GDP   3% of GDP     2.1% of GDP

Maastricht criteria     3% of GDP      3% of GDP     3% of GDP   Met

Debt outstanding      45% of GDP    45% of GDP   46% of GDP

Maastricht criteria     60% of GDP    60% of GDP   60% of GDP  Met

Qualifies to enter

the EMU                          YES                   YES                     YES

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