Earlier this year, Greek citizens, fearing currency changes or capital controls,

Question

Earlier this year, Greek citizens, fearing currency changes or capital controls, took billions of euros out of their bank accounts. Some of it they sent to banks in other countries, and some of it they even hid in flower pots, freezers, and yes, under mattresses. Think about all of this money flowing out of Greek banks. a. What effect will this have on Greece’s net capital outflows? Explain. b. What effect will this have on the real exchange rate? It will make the real exchange rate ____________________________. c. Draw a graph showing the relationships among net exports, net capital outflows, and the real exchange rate, where the market is in equilibrium at *. Show the changes you described in part “a” and “b.” Be sure to label each axis, all curves, and the initial and final real exchange rates. d. Net capital outflows were simultaneously affected by the response of foreigners to the Greek crisis. What happened to capital inflows into Greece? Capital inflows _________________________________. e. Did the change in part “d” offset or exacerbate the change in the real exchange rate? Explain.

Explanation / Answer

Main Content of the Question - Earlier this year, Greek citizens, fearing currency changes or capital controls, took billions of euros out of their bank accounts. Some of it they sent to banks in other countries, and some of it they even hid in flower pots, freezers, and yes, under mattresses. Think about all of this money flowing out of Greek banks.

a.) Well, a tough situation where few influential people of Affluent Society in a nation (in this case Greek citizens) produces panicky on the Banking system. In such a scenario, there is severe crunch in Liquidity of money. Exchange & Circulation of money gets tough. Market sentiments in the nation gets deeply effected. Commodity prices unwantedly suffers severe price rise. Net Capital Outflow (of Currency) increases. This badly effects Balance of payments of Imports & Exports.

b.) The real exchange rate will suffer drastically. Here the Greek Currency will badly depreciate in Foreign exchange market. Because of this the country will suffer sevre financial burder on Governments Exchequer.

Very tough, pathetic & depressing situation for any National economy to handle. Please note, Just a Coterie of people produces panicky & havoc into the smooth functioning of National Economic System. Very sad situation. Deeply regretted.

Submitted...!!!!!

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