In 2010, the Greek government had to inform the European Commission of how it would control its budget deficit and improve the performance of its economy. The government's debt was so high that agencies assessing the creditworthiness of the government downgraded it (which would mean more interest had to be paid to raise financing). In other words, the risk premium for Greece had increased. It was expected that the Greek government's proposal to the European Commission would include a 10% cut in government spending.

Q1) Can the government just print money to pay off its debt? Why or why not? (what currency does Greece use?)

Q2) Consider the following scenarios

A) what is the starting point of the economy and where does the economy go assuming that the federal government reduces spending by 10%)

B) Assuming that the Greek economy is at the top end of an expansion, what would you expect to be the effect of a contractionary fiscal policy on: i) Inflation? ii) Unemployment? iii) Imports?

C) Assuming that the Greek economy is at the bottom of a recession, what would you expect to be the effect of a contractionary fiscal policy on: i) Inflation? ii) Unemployment? iii) Imports?

Q3) Why might the answer to parts (b) and (c) be different depending on whether you are in a recession or an expansion? In other words, why is the current "location" in the business cycle important? If the Greek economy were in an expansion rather than a recession, would we be talking about Greece at all?