a) Member countries of the European Monetary Union face restrictions on the macroeconomic policies they can adopt. For example, they are ordinarily not allowed to post government budget deficits in excess of 3 percent of GDP and their debt-GDP ratios are not supposed to exceed 60 percent. What is the rationale for these restrictions? More generally, what are the arguments in favour of and against placing restrictions on policy makers? Explain and elaborate on each of your arguments.

b) In light of your answer in (a) why do you think countries such as Portugal, Spain, Italy and Greece, which traditionally experienced relatively high inflation rates, joined the European Monetary Union in the first place? That is, why did they give up monetary sovereignty? Explain.