Question
part 1) In 2010, when the rest of the world began recovering from the global financial crisis, the Greek economy hit another setback. The Greek
part 1) In 2010, when the rest of the world began recovering from the global financial crisis, the Greek economy hit another setback. The Greek government was forced into a series of austerity measures (cuts to government spending). From 2010-2015, industrial production fell by 30%, inflation fell to -2%, and long-term bond rates spiked at 30%. It was ugly. Using graphs of the IS/MP and AD/AS framework show the following:
i. A decline in government spending by the Greek government
ii. An increase in the risk premium on Greek debt.
Part 2) When the United States experienced a similar shock, the Federal Reserve was able to quickly set interest rates to zero, flood the banking system with money, and purchase long-term alternative assets. Because Greece is part of the Euro Zone, they Greek central bank was unable to use independent monetary policy to stabilize their economy. Starting from your results in the previous part., use graphs of the IS/MP and AD/AS framework to show how the loss of monetary policy worsened the crisis. Be sure to compare how the outcome would be different if Greece had the ability to conduct independent monetary policy.
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