1.In 1991, the twelve original member countries of the European Union adopted the Maastricht Treaty, also known as The Treaty on European Union. You can learn more about the Maastricht Treaty here: https://www.ecb.europa.eu/explainers/tell-me-more/html/25_years_maastricht.en.html

The Treaty established the European Union; created the European Central Bank and the Euro; and established the rules for adopting the Euro, also known as the convergence criteria or Maastricht rules. For a summary of these rules, please refer to https://ec.europa.eu/info/business-economy-euro/euro-area/enlargement-euro-area/convergence-criteria-joining_en

One of the four convergence criteria required countries adopting the Euro to have "sound and sustainable public finances", defined as a government deficit that was not higher than 3% of GDP and government debt that was not higher than 60% of GDP. [18 points total]

(a)What was the purpose of this criterion and how does it benefit the European Union as a whole? (Hint: think of the impact of lower deficits and public debt levels on the member countries' ability to borrow.) [4]

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(b)What are the advantages and disadvantages of such a rule? Specifically, how can this criterion constrain the behavior of politicians and how does it influence the ability to conduct fiscal policy in response to adverse economic shocks? When shocks take place, are they likely to impact all countries equally? [8]

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(c)Some economists have argued that the fixed deficit and debt limits, such as those stipulated by the Maastricht Treaty, must be replaced by flexible ones that are delegated to an independent "Public Debt Board" that can be put in charge of managing fiscal policy aggregates. [For a survey of the debates concerning such institutions, see Xavier Debrun, David Hauner, and Manmohan S. Kumar, "Independent Fiscal Agencies," Journal of Economic Surveys, Feb 2009, Vol. 23 Issue 1, pp. 44-81. The article is available electronically at the University of Illinois Library at http://www.library.illinois.edu/proxy/go.php?url=http://search.ebscohost.com/login.aspx?direct=true&db=eoh&AN=1025809&site=eds-live&scope=site]. The Debt Board can be fashioned after the model of the European Central Bank, which oversees the Union's monetary policy. Compare this alternative arrangement with the Maastricht Treaty rules and explain whether a Public Debt Board may be an improvement or not. Please explain your logic in detail. [6]

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2. This questions is based on the article, "Surrender your dollars, urges Turkey's President Erdogan," published by The Economist on June 14, 2018. The article examines the origins of Turkey's macroeconomic policies and their potential consequences. [42 points total]

(a)According to the article, Turkey's economy has grown very fast between mid-2016 and early 2018. If that is the case, why are Turkish large corporations trying to restructure their loans and Moody's has downgraded the ratings of 17 Turkish banks? [8]

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(b)According to the article, what factors have caused concern among investors about the prospects of the Turkish economy? [9]

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(c)Based on the information in the article, does the Turkish economy seem to have worked above, below, or at its production capacity in 2017? What is the evidence? [7]

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(d)According to the article, how may the June 2018 elections have affected fiscal policy in Turkey prior to the election? [3] Are the government ministers promising that the current macroeconomic policies would continue after the elections? [3] Under these circumstances, does fiscal policy seem procyclical or countercyclical, or acyclical? Explain your answer. [4]

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(e)According to the article, how does President Erdogan explain the fall of the lira to his constituency? What does he propose to his constituency as a solution to the depreciation problem? [8]

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(f)Extra Points Question: According to the article, what do the AK Party voters believe about President Erdogan's explanation of the causes of the lira's depreciation? [3] Are those voters' opinions similar or different from the views of situation held by Turkey's foreign creditors? [2] What are the possible reasons for the similarities or differences of the beliefs held by the creditors and AK Party voters? [5]

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