In 2010, the Greek government had to inform the European Commission on how it wo

Question

In 2010, the Greek government had to inform the European Commission on how it would control its budget deficit and improve the performance of its economy. The government’s debt is so high that agencies assessing the creditworthiness of the government downgraded it (which would mean more interest has to be paid to raise finance). Proposals were likely to include a 10% cut in government spending.

1. Outline two possible economic objectives of the Greek government.

2. Explain why the government’s budget deficit might be in a large deficit.

3. What would the effect on aggregate demand and Gross Domestic Product (GDP) be if the government cut public spending by 10%?

4. What actions can the government take to increase national income growth in Greece?

5. If the Greek economy is in recession what would you expect to be the effect on:

Inflation? Explain your answer

Unemployment? Explain your answer

Explanation / Answer

1) The two possible economic activities of the government would be to decrease their budget deficit and service their debt properly; and to decrease the cost of government, which should decrease the cost of debt for private businesses, which can then start ivnesting and creating jobs.

2) The government budget deficit is in a large deficit because of low revenue and high expenditure. In other words low taxes, and large welfare expenes.

3) The GDP will decrease by more than 10%, depending on the value of the multiplier.

4) Government should redirect some of the funding to productive investment avenues like infrastructure, which creates private investment and thus creates jbs.

5) Inflation will decline as demand for goods will be severely constrained. This will also cause unemplyment to rise as producers will cur back production.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.