How to answer 10&11 for full points? FRED ebi US Figure 6: The size of the publi

Question

How to answer 10&11 for full points? FRED ebi US Figure 6: The size of the public debt, in the USA(solid) and Greece(dashed), as a percent of GDP FRED eest Figure 7: The amount of interest paid each year on the public debt, in the USA (solid) and Greece(dashed), as a percent of GDP In the above graphs, we see the size of the debt in the United States and Greece, and how much they pay each year in interest on their public debt. 10. Explain why, despite the fact that the the debt increased in both countries by a similar amount after the 2008-2009 recession, Greece was in danger of default, while the United States was not. 5 points. veece had h cerest eres n ter acbt 11. Explain why Greece was probably less able to use both Fiscal and Monetary policy tools to fight the 2008 recession, compared to the United States. 10 points.

Explanation / Answer

10.
A country becomes more in danger of the default, when the interest payment of the debt, approaches the total size of the GDP. It means that whole GDP is unable to pay the interest of the debt. It is the situation, Greece is about to face as depicted by the figure 7, when the interest paid is the relatively higher % of the GDP in comparison to the USA. It makes Greece to be more prone to the case of default. Though, the USA will not face the problem, because of its underlying macroeconomic strengths and less % of interest and debt as a part of the GDP. Besides, US GDP is many times bigger than the GDO of Greece. Therefore, Greece has a relatively higher scope of default.

11.
To fight the recession, it is important to apply the expansionary monetary and fiscal policy. But, Greece has already taken a huge amount of debt as a percent of its GDP. Here, the interest payment is also approaching as a higher percentage of the GDP. So, further debt financing as a part of expansionary fiscal policy is not possible. Rather, the government of Greece, requires to take austerity measures and it does not help in fighting recession. So, it is said that Greece cannot use both the policy tools to fight recession.

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