a) A country in the European Monetary Union that either runs a very large public deficit or shows a persistently high and rising debt to GDP ratio violates a fiscal compact among the member countries of the union. Explain how this fiscal violation poses a challenge for the ECB in the form of moral hazard (10 marks)

b) According to many studies, in industrialised countries there is strong evidence of a negative relationship between central bank independence and inflation. Explain what are the three limitations to this finding. (10 marks)