Reference no: EM133204048

Assignment:

Q: Greece during the Great Recession. The Greek economy experienced a major contraction during the Great Recession. Due to the collapse of private investment, economic activity fell and tax revenues plummeted. In 2010, as a precondition to receive financial assistance, the European Commission (EC) and the International Monetary Fund (IMF) instructed the Greek government to commit to a remarkable reduction in government spending during the entire decade. According to these organizations, such policy would help lower the primary deficit and stabilize the government debt-to-GDP ratio.

1. Initially, suppose the European Central Bank did not change the nominal interest rate and the Greek government did not reduce government spending. Use the ISMP diagram, the Philips curve and Okun's Law to explain the response of output, inflation and unemployment to the collapse of consumption and private investment?

2. The European Central Bank lowered the nominal interest rate to combat the European recession. However, its effects in Greece were dampened by the contraction of government spending. Use the IS-MP diagram to illustrate this scenario.

3. By the end of the decade, output in Greece was well below potential and debtto-gdp ratio had doubled with respect to its level in 2010 despite the attempts of the Government of closing the primary deficit. In what sense the contraction of government spending might have led to this scenario? Explai.

3. Government Debt and Deficits

As a result of the measures to combat the Covid-19 pandemic, governments around the world expanded their budget deficits remarkably, and they are expected to maintain large deficits for some time.

1. Explain how the debt-to-gdp ratio will evolve depending on the size of the deficitsand the growth rate of economy.

2. Consider the case of developing countries.

i) Why do these countries tend to facehigher borrowing rates -relative to developed countries-?

ii) Explain the consequences of facing higher borrowing costs for the debt-to-gdp ratio and future deficits?

3. Consider the case of the US economy. Suppose that current high inflation ratespersist during the next years. How will this affect the evolution of the US debt-togdp ratio? Explain.