International Macroeconomics question, only need to answer question (b) and in d

Question

International Macroeconomics question, only need to answer question (b) and in detail please, thanks.

(a) The recovery of output after the Financial Crisis was the slowest ever observed in UK history. Many economists believe that this was due to the measures of austerity introduced by the government to reduce debt. George Osborne, the Chancellor of the Exchequer at the time, described the plan with which public debt should be reduced while at the same time stabilising output in the following Monetary activism to keep interest rates low and stimulate the economy. Fiscal respon sibility i.e., fiscal contraction] to restore confidence and rebuild our battered public finances Use the IS-LM-FX model to explain Osborne's plan. Contrary to Osborne's expectations, the (40 marks) economy was not stabilised, but contracted. Can you explain why? (b) The measures of austerity were primarily introduced because of the government's fear that the high level of government debt could result in a debt crisis akin to Greece. Is this likely to have (30 marks) happened without austerity? Discuss

Explanation / Answer

b. Austerity measures are taken by the government in the form of diminution in government expenditure or increase in tax revenue or both. Strict steps are taken by the government to reduce deficit. If a country lacks flexibility in responding to the currency devaluation may face greater challenge in the form debt crisis in the absence of austerity measure. A quick response to the economic crisis may reduce the bad effect and economic pain.

Without austerity measures the probability of rising debt crisis is higher for the former types of countries. When creditors are concerned about the default of debt repayment due to higher debt to GDP ratio, creditors demand higher rate of interest. Payment of debt becomes more difficult for that country. That country thus requires a take new loan from IMF or other countries with some strict condition or austerity measures. Hence, without austerity measure debt crisis becomes inevitable.

However, there are arguments against the austerity measures in the context of debt crisis. Austerity measures reduce the aggregate demand and may further lead to the lower economic production. Low production is resulted in lower wage, decrease in standard of living and decline in purchasing power.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

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