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  • Created by: Holly
  • Created on: 08-01-13 13:47
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  • Extract 2
    • Just like in most other markets
      • All other things remain equal
      • Supply of money from money from MS1 to MS2
        • Increase in price of money (interest rates) from R1 to R2
    • In Argentina and Greece there is long history of government borrowing
      • Greece became relatively cheap and easy to borrow
        • Financial institutions task into consideration that Greece was part of Euro ('Super Currency') backed by many large powerful countries, notably Germany ( known for record of fiscal and monetary prudence).
          • Consequence for Greece as it is a small country with high levels of government debt and low productivity growth but could borrow at same rate as Germany
      • Too tempting as Greek government increase government borrowing
        • To fund Olympics
        • Very high state pension (around 92% of fiscal earning)
        • Increase in public sector pay (nearly doubled in 10 years)
        • Keeping taxes low
          • Popular but incomes increase
      • Situation made even worse
        • Economy starts to decline
        • Cost of borrowing increase
    • Situation made even worse
      • Cost of borrowing increase
    • Greece and Argentine government finances already weak as they had taken advantage of cheap loans
    • Private borrowing and spending in Greece encouraged by loose monetary conditions
      • Adaption of the Euro
      • Cheap money
        • Led to property bubble
        • Consumer buying lots of luxury goods
          • Money flowed in
            • Soaked up in property bubble
            • Ended up as increasing Greek Current Account deficit
    • View taken by EU as whole of Greece's fiscal record
      • Rules regarding levels of government debt that countries can have to join Euro 'rules'.
    • Questionable to whether Greece ever met the initial rules regarding government debt
    • Even more damaging is the fact that Greece (as well as PIIGS) had 'difficulties' abiding with Stability and Growth Pact (SGP) rules
      • Pressure on their credibilty
      • Impact of loss of credibility regarding fiscal prudence is cost of borrowing to countries like Greece increases financial markets see increase in risks.
  • Quantity of anything supplied falls
    • Just like in most other markets
      • All other things remain equal
      • Supply of money from money from MS1 to MS2
        • Increase in price of money (interest rates) from R1 to R2
  • Price falls
    • Lower retirement age
      • Too tempting as Greek government increase government borrowing
        • To fund Olympics
        • Very high state pension (around 92% of fiscal earning)
        • Increase in public sector pay (nearly doubled in 10 years)
        • Keeping taxes low
          • Popular but incomes increase
    • Increase in wages faster than productivity
      • Government debt increases even more (in Fig 2.1 for Greece and Argentina)
        • Increase in wages faster than productivity
        • Lenders become more aware of risks of lending to countries with high debt
          • Cost of borrowing increase
        • Economy starts to decline
          • Situation made even worse
            • Cost of borrowing increase
        • Lenders become more aware of risks of lending to countries with high debt
          • Types of Debt - + Budget Deficit (% of GDP) This is the difference between the amount of money a government receives (mostly from tax receipts) and how much it spends in one years.    + National Debt (% of GDP) the total amount of money a government owes.    + Current Account Deficit (% of GDP) Net exports minus imports +/- earnings on foreign investments minus payments made to foreign investors) and cash transfers.
          • Economic output falls > Unemployment increases > Income and profits fall > Tax receipts fall and benefit payments increase > Government borrows to pay for any shortfall (PSNCR) > Cost of borrowing increases as risk of government debt increases

          Comments

          Chloe

          Woww you amazed me with your economic mindmap. thanks for liking mine ;)

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