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SURNAME.............................................. NAME...................................................... STUDENT I.D........................................

EUROPEAN ECONOMIC POLICY

INTERMEDIATE EXAM xx April, h. 8.30 (Time allowed: 1h15) MOCK EXAM

The exam is composed of two parts: one long open question on the theories of economic integration ten multiple choice questions on EU policies

The long open question is worth 21 points, the short questions are worth one point each. Use only the exam papers for your answers, writing in the allocated spaces. In the long open question, always indicate the variables on the axes and always state your assumptions when describing a model. In the multiple choice question, you have to mark clearly only one answer which you consider correct. You can use the back of each sheet as scratch copy. Very important: remember to sign your exam paper, otherwise it will not be corrected

Buon lavoro!

EXAMPLE OF THEORETICAL QUESTION 1. Theory of Economic Integration Answer to each of the sub-questions: a. Define a Customs Union (3 points)
The typical feature of customs unions is that participating countries, apart from abolishing all restrictions to trade among themselves, also relinquish their ability of independently fixing their tariffs toward the rest of the world in favour of a Common External Tariff (CET). As a result, countries have to find an agreement in order to fix the CET at a level which is convenient for each member of the customs union, and in order to share proportionately the revenues accruing from the application of the tariff to the imports from the rest of the world.

b. Under standard assumptions on the shape of Demand and Supply, no capital mobility and no transport costs, consider two (small) countries of similar size. Country H, which adopts a less than prohibitive tariff (TH < pH, the equilibrium price in the closed economy), and country P, which adopts a prohibitive tariff (TP = pP) and is more efficient than country H (pP < pH). Show, using the appropriate graphs, the effects of the creation of a tariff-averaging Customs Union between H and P. Justify your answer. (12 points)

This is Figure 2.7 of the textbook. The effects under 1-2 are the usual trade creation ones, divided into production (1) and consumption (2) effects. Area 3 is trade diversion. Area 5 is the positive net welfare effects of producers. Area 6 cancels out in terms of net welfare. Note in the construction that CET is a market-clearing equilibrium price, with the excess of supply of country P (the quantity FE) equaling the imports of goods of H from P (the quantity CD=FE).
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c. Starting from the equilibrium derived under b), consider now the case in which the supply curve of country P is hit by a positive technological shock. Show graphically what would happen in this case to the prices and hence to the welfare effects in country H. (6 points)

If the supply of P is hit by a positive technological shock, it shifts to the right in SP, lowering the internal equilibrium price at p (and production in Q). [It does NOT turn into a supply curve with economies of scale: the latter assumes that there are positive fixed costs; so, why should a positive technological shock imply that fixed costs emerge ?] Given CET, the tech shock raises the excess of supply of country P from FE to FE. Therefore, the sum of SH+MP in country H shifts to SH+MP where, given CET, FE = CD [Note also that SH+MP starts from a lower p than SH+MP] The main difference with the previous graph is that now CET is not a market-clearing equilibrium price, because CD (the quantity that would absorb all the excess of production now produced in P) is larger than the desired imports of H (CD). Therefore, H will have more supply from P than it wants, and thus the internal price of H should decrease to the level CET, where market clearing is restored (excess of supply in P, given S = imports by H, not shown in the Graph above). When the price in H goes to CET, it entails larger trade creation (1 and 2) and smaller trade diversion (3).

EXAMPLE OF MCHOICE QUESTIONS 2. EU Policies Multiple choice questions (1 point each, only one answer per question is correct) 2. The annual EU budget is voted: A. unanimously by member States B. unanimously by member States with an opinion of the European Parliament C. jointly by the European Parliament and the Council, in co-decision D. only by the European Parliament

3. The Financial Perspectives do not: A. run on a seven years horizon B. require a unanimous vote by the European Council C. require a proposal by the European Commission D. deal with the budgetary fiscal discipline of Member States 4. Which of the following is the largest expenditure of the EU budget for the period 2000-2006? A. external actions B. common agricultural policy C. regional policy D. economic and monetary union 5. Which of the following is not a EU budgetary resource ? A. a portion of the VAT raised in Member States B. a portion of the income tax raised in Member States C. provisions from the Common External Tariff D. sugar levies 6. In the current legal framework of the CAP: A. quotas are forbidden due to the WTO regulation B. quotas are part of the tools employed to control production C. quotas are allocated on the basis of historical production records D. there are no quotas