According to the Theory of Optimum Currency Areas, a Currency

question 54

Multiple Choice

According to the theory of optimum currency areas, a currency area has the least chance for success when

• A) countries of the currency area have differing business cycles.
• B) workers have a high degree of mobility across borders of the currency area.
• C) prices and wages can be adjusted in response to economic disturbances.
• D) a single monetary policy affects all member countries in the same manner.

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Definitions:

Cost of Debt

The actual rate a firm incurs on its overall debt, representing the cost of acquiring funds.

Equity Risk

The risk of loss associated with fluctuations in the price of equities or stocks.

M&M Proposition I

A principle in corporate finance that asserts the market value of a firm is unaffected by the capital structure, assuming no taxes and perfect markets.

M&M Proposition II

A theory proposing that the cost of equity increases with the level of debt in a company, making the firm's weighted average cost of capital remain unchanged.