Greece's economy has been in the balance for months, but the seeds of the crisis were sown a decade ago. With a public-sector deficit approaching 12.5% of GDP – more than four times the stipulated EU amount and nearly double the level announced by the previous conservative administration – the gravity of the situation has not been lost on Athens' new socialist government. This is without doubt the worst economic crisis since the restoration of democracy [in 1974]."

National debt – the highest in the EU and projected to rise to 135.4 % in 2011 – has made the outlook grimmer still. After years of posting 4% growth rates, the economy is expected to contract 1.2% in 2009 with unemployment levels tipped to top 9% amid growing poverty. The economist predicted the Greek, face a deflationary gap, if this situation continues.

So in 2010, The Greek government was asked to inform to the European Commission on how it would control its budget deficit and improve the performance of its economy. The government’s debt is so high that agencies assessing the creditworthiness of the government downgraded it (which would mean more interest has to be paid to raise finance). Proposals were likely to include a 10% cut in government spending.

1). As mentioned in the case, the Greek economy is going under recession. When the economy is in recession, how does it affect the marginal propensity to consume? And relate this how the effect on MPC is affecting on the multiplier.

2). The government has decided to reduce the public spending by 10% to manage the deficit. Explain this scenario and how the reduction of government spending can control the deficit

3). After years of experiencing 4 % growth rate, the Greek economy moved to 1.4 % in 2009. In a situation like this, will it lead to inflation or deflation and how it will affects on unemployment: How the banking system helps to overcome this situation?

4). When Greek is predicted for deflationary gap, Explain the impact of deficient demand in the economy in such situation Important: - Each answer should have minimum 100 words, if data or table used to support your answer, must give proper reference.

Answer rating: 100% (QA)

1 A recession is a period of economic contraction where businesses see less demand and begin to lose money To cut costs and stem losses companies begin laying off workers generating higher levels of u... View the full answer