1. While the US government is sovereign in its own currency, increased nominal expenditure on health care will still reduce the real resources available for other uses and so political choices have to be made.

Answer: False

2. In 2001, Japan defied the ratings agencies who had downgraded their sovereign debt. They refused to alter their fiscal commitments despite constant pressure to cut the deficit. Given that countries such as Greece and Portugal are unlikely to be expelled from the EMU if they continue to exceed the Stability and Growth Pact conditions, they should similarly resist the demands of the ratings agencies for increased fiscal austerity and thus spread their fiscal adjustment over a longer period which would inflict less damage on their nations.

Answer: False

3. Fiscal rules such as are embodied in the Stability and Growth Pact of the EMU will continually create conditions of slower growth because they deprive the government of fiscal flexibility to support aggregate demand when necessary.

Answer: False

4. It is clear that EMU nations cannot use the exchange rate mechanism to adjust for trading imbalances arising from a lack of competitiveness within the Eurozone. With fiscal and monetary policy tied by the EMU arrangements, the only adjustment mechanism left is to reduce wages and prices to restore competitiveness. While harsh this will ultimately improve the competitive position of Greece, Portugal, Ireland and other nations currently in external deficit.

Answer: False

5. If the US budget deficit keeps rising to meet the need for more fiscal stimulus, it would have to bear the political costs of a rising public debt ratio. This is one of the reasons the US government is talking about reducing net spending.

Answer: False