Problem Set 1, International Economics, NYU, Summer 2012 Gilberto Noronha Due 07/09/2012 1 Random Numbers Generation Later we are going to do simulations, and we need to be able to generate sequences...

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Answered Same DayDec 23, 2021

Answer To: Problem Set 1, International Economics, NYU, Summer 2012 Gilberto Noronha Due 07/09/2012 1 Random...

David answered on Dec 23 2021
122 Votes
Answer to 2:
The Euro zone has been filled up with turmoil that has ranged from stock and bond
markets to exchange rates, government spending, and tax rates. The worst hit
economy by this crisis has been Greece. Although the economy of Greece is just
2.6% of euro-zone GDP, it has triggered big catastrophe for the economies of
euro-zone. Investors have started worrying that this debt may not be sustainable:
concerns rise over the ability of the state to pay back capital and interests by
generating budget surpluses in the future (that is, fiscal revenues in excess of
expenditures). In this case, investors require higher interest rates to subscribe new
public debt as a compensation for the risk of insolvency. This in turn increases the
risk of insolvency as it worsens public sector balance sheets. At some point, there
may no longer be an interest rate able to compensate investors for the risk of
insolvency; then they just stop subscribing the public debt. It poses three broad
warning to the Greece economy and for the rest of Eurozone:
1. The crises of Greece have raised the concerns that whether, in future, the
government will be able to generate enough budget surplus to make capital
and interests payment and this concern is increasing to other parts of euro-
zone as well. Given this scenario, investment would be willing to subscribe
to new public debt only when they are paid higher interest rate as a
compensation for risk of insolvency. This in turn will further worsen public
sector balance sheets and will further increase the risk of insolvency.
2. The government to deal with this situation may respond through
monetization of the debt. This monetization will increase the money
supply and thus will generate inflation and exchange-rate depreciation. If this
happens, then it would negatively affect the price stability in the Euro-zone
region and imply a significant transfer of resources from strong to weak Euro
zone countries.
3. This financial turmoil has triggered many problems such as: decline in
domestic and foreign investor’s confidence in the economy driving huge
capital outside the euro-zone countries, Public unrests as we have seen
in Greece and few months back in London, Riots as people in frustration of
not having job and employment, frustrated with austerity drive by
government, targets people with different ethnicity and immigrants.
The current approach of austerity and structural reform in public finance to
Eurozone and Greece crises that is being followed by France, European Union and
Germany is failing because it suffers from many problems: Although it might be
possible that these austerity drive and structural reforms would be able to bring the
deficit in public finance under control or even eliminate them by 2012-13 but it will
not be an achievement to be proud in the sense that it will come up at the cost of
huge poverty and the unemployment. The problem is not spending but the
structure of European Monetary Union. Unless the current imbalances in the
current account of Eurozone are addressed, these austerity measures and
structural reforms would be self-defeating as deflation and lower growth will further
exaggerate the debt problem while continuing to ignore social sector. The European
Union is required to work as an entity and need to follow a unified and expanded
fiscal and monetary policy where central bank is able to and willing to work as
lender of last resort. The present case of austerity and structural reform should not
continue to be the only option, otherwise, it will lead to the end...
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