Question

The structural weakness in the Greek economy caused by a decade long high budget deficit and high debt to-GDP led to a loss in investors’ confidence on Greek’s ability to meet its debt obligations since the outbreak of Euro Zone crises in 2009. The Greek economy is officially in a recession with high unemployment, high inflation and low economic growth. The level of debt in Greek is over 100% compared to Australia’s net debt of about 13%. What advice would you give to the Greek government to boost their economy? Critically justify your answer.

Answer 1

• Loosening of monetary policy – cutting interest rates to reduce cost of borrowing and encourage investment
• Expansionary fiscal policy – increased government spending financed by borrowing will enable an injection of investment into circular flow
• Ensure financial stability – in a credit crunch, government intervention to guarantee bank deposits and major financial institutions can maintain credibility in the banking system

• Establish financial stability: If people lose confidence in the banking system, it could cause bank closures, rapid fall in confidence and decline in money supply. Therefore, Central Bank/government act as lender of last resort – guaranteeing savings. Home repossessions can cause bank losses and fall in consumer spending.

  The government may try to freeze mortgage rates to preventing house repossession or give subsidies to homeowners facing repossession.

• Devaluation. A devaluation in the exchange rate can cause a boost in aggregate demand. A fall in the value of the dollar makes exports cheaper and imports more expensive increasing domestic demand