Contractionary Fiscal Policy (CFP) to tackle Government Debt Through CFP, government spending is reduced and taxes are increased. A fall in government spending results in a fall in government debt directly. When taxes are raised, the Greek government collects more tax revenues to supply their revenue and improve their debt. The effects of government cutting expenditure will be amplified due to the expenditure multiplier effect. Between cutting government spending and increasing taxes to lower government debt, it is more rational to cut government spending because the tax multiplier is always smaller than the expenditure multiplier by one. Hence, cutting government spending has a larger effect compared to increasing tax. Limitations of CFP The government takes money out of consumers' hands when they increase taxes. The government will also cut their spending in areas of subsidies, transfer payments including welfare programs, contracts for public works, or the number of civil servants. Hence, with increased taxes, CFP reduces the amount of money available for businesses and consumers to spend, which will result in a decrease of aggregate demand and overall consumption to decrease. This reduces business profit, which forces companies to cut employment and investment expenditures. As a result, a fall in consumption and investment will lead to a fall in AD and lower the nation’s GDP.
Unemployment Implications of Unemployment Unemployment rate is measured by calculating the percentage of the labour force that is unemployed in the country. There are several implications of high unemployment rate in Greece. Firstly, it causes loss of income to the unemployed and lowers the country’s GDP. Most of the unemployed in Greece would face a decrease in spending power, thus a decrease in consumption as well as output. AD falls and national income falls by a multiple via the expenditure multiplier effect, resulting in slow economic growth. Secondly, high unemployment rate causes an increase in social problems such as higher crime rates and worsens the quality of living. As a result, it deters potential investors from investing in Greece. This has a negative effect on the long run aggregate supply (LRAS), hindering potential growth. Increased welfare payouts may need to be given, hence worsening government debt. Devaluation of Exchange Rate to lower Unemployment Rate Through devaluation of exchange rate, it means that the value of Greek currency is lowered. This would lead to Greek’ exports becoming cheaper and imports becoming more expensive. With Greek exports becoming cheaper, it will be more competitive in the global market, which leads to a rise in demand for exports. Part of AD is (X-M) therefore higher exports and lower imports should increase AD. As imports become more expensive, people would buy more domestic goods. Furthermore, a substantial devaluation of 50% to 70% could create many long-term opportunities to develop new export industries. With this increase in demand of Greece products, it would help to create more jobs and thus tackle Greece’s issue of high unemployment rate. Lastly, it will boost the tourist industry as it is less expensive to travel to Greece. This helps to
You've reached the end of your free preview.
Want to read all 9 pages?
- One '17