Essays on The Interest Gates in Greece, Analysis of Bailout of Greece as a Policy from the Perspective of ECB Assignment

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The paper 'The Interest Gates in Greece, Analysis of Bailout of Greece as a Policy from the Perspective of ECB" is a good example of a finance and accounting assignment. A fall in interest rates leads to an increase in investment (Brentani 2004). When there is increased investment particularly on capital goods output of goods and services increases in the economy. According to Wiseman (2013), an increase in the planned investment coupled with an increase in autonomous consumption through the multiplier effect leads to an increase in Real GDP.

Consequently, increased investment leads to the creation of more jobs thus increased employment. When there is increased employment it means that people have more disposable income, which increases the aggregate demand for goods. An increase in aggregate demand could lead to prices rising leading to an inflationary situation. “ If the government of Greece also increases the expenditure (expansionary fiscal policy) then what do you think can potentially happen to prices? ” Real Aggregate Expenditure ($ trillions)Price Level AE 2 F AE 1 E   AD 2 450 AD 1 10 12.5Real GDP ($ trillions) 10 12.5 Real GDP An increase in government expenditure may be implemented in many forms such as through salaries and wages to state workers, social security benefits, and better infrastructure – roads and railways, water, and sanitation among others.

An increase in government expenditure has an effect of transferring assets to the public (Duggan & Scott 2004; Qi, Shen, & Dou 2013). National income or output can be given by the equation Y = C + I + G + NX where Y is the output or national income, C is consumption spending, I is investment spending, G is government expenditure and NX is the net exports (exports minus imports) (Krugman & Obstfeld 2000).

Consequently, an increase in G causes an increase in Y. An increase in expenditure (expansionary fiscal policy) causes an increase in aggregate demand, which has an effect of increasing prices of goods. An increase in government expenditure has an effect of increasing output and in the process creating employment (Palmatier & Crum 2003). An increase in the number of people employed means that there is an increase in disposable income from salaries and wages paid. Consequently, an increase in disposable income leads to a higher aggregate demand, which has an effect of increasing the prices of goods that could lead to an inflationary situation. Do you think that bailout of Greece is a health policy from the perspective of ECB? The bailout of Greece from the perspective of ECB is not a healthy policy.

ECB in its attempt to bail out Greece uses expansionary monetary policy. That is open market purchases that lead to the increased money supply in the economy. An increase in the money supply increases the demand for securities such as bonds that raises their prices (Choudhry 2010; Brentani 2004).

Bond prices and interest rates have an inverse relationship thus interest rates in the country fall.

References

Brentani, C 2004, Portfolio Management in Practice, Burlington, MA, Oxford [England

Choudhry, M 2010, Capital Market Instruments: Analysis and Valuation, Palgrave Macmillan, Houndmills, Basingstoke

Duggan, M & Scott, M 2004, The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing, National Bureau of Economic Research, Cambridge, Mass

Hollander, B 2011, How Currency Devaluation Works, Rosen Pub., New York

Krugman, P & Obstfeld, M 2000, International Economics: Theory and Policy, Addison-Wesley, Reading Mass:

Megginson, W & Smart, S 2001, Introduction to Corporate Finance, Cengage Learning.

Palmatier, G & Crum, C 2003, Enterprise Sales and Operations Planning: Synchronizing Demand, Supply and Resources for Peak Performance, J. Ross Publication, Boca Raton, Fla

Park, D 2008, Capital Outflows, Sovereign Wealth Funds, and Domestic Financial Instability in Developing Asia, Asian Development Bank, Manila

Qi, E, Shen, J & Dou, R 2013, The 19th International Conference on Industrial Engineering and Engineering Management: Assistive Technology of Industrial Engineering, Springer, Berlin

Rajan, R 2001, (ir)relevance of Currency-Crisis Theory to the Devaluation and Collapse of the Thai Baht, International Economics Section, Princeton, NJ

Schneider, B 2003, Resident Capital Outflows: Capital Flight or Normal Flows? A Statistical Interpretation, Overseas Development Institute, London

Wiseman, L 2013, The Multiplier Effect: Tapping the Genius Inside Our Schools, Corwin, Thousand Oaks, CA

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