Greece is a member of the Eurozone. It uses the Euro as its maincurrency. Hence, the Greek currency is fixed relative to othermembers of the Eurozone but the value of Euro fluctuates relativeto other currencies. Hence we can view the Greek currency as beingflexible relative to countries outside the Eurozone. Also note thatfor a prolonged period of time, the Greek government was spendingmore than it was raising in tax revenue. Creative accountingunderstated the size of government borrowing until the late 2000sbefore the real size of the government debt and deficit wasrevealed. 1A trade weighted nominal exchange rate is an average ofthe value of the Australian dollar against Australia’s twentylargest trading partners. 2 (a) Suppose Greece had its owncurrency, say the Drachma, and a flexible exchange rate. Describewhat would have happened to the exchange rate when the real size ofthe government debt was revealed? What effect would this change inthe exchange rate have upon the real economy in Greece? (b) Greeceis a member of the Eurozone. What effect upon the Euro didrevealing the size of government debt have upon the value of theEuro? What effect would this change in the exchange rate have uponthe real economy in Greece? (c) What do you think were the costsfor Greece of joining the Euorzone, and what do you think have beenthe benefits?

Answer rating: 100% (QA)

answer a If Greece had its own currency the Drachma and a flexible exchange rate the revelation of the real size of the government debt would likely l... View the full answer