last word If a country such as Greece that has joined the European Monetary Union can
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last word If a country such as Greece that has joined the European Monetary Union can no longer use an independent monetary policy to offset a recession, what sorts of fiscal policy initiatives might it undertake? Give at least two examples |
Explanation
The Union EM comprises of a few countries that have a common monetary policy.
Since, a common monetary policy is followed by the member countries, Country G that is going through a recessionary phase would not be able take suitable actions to fix the situation. To reduce the recession, the interest rate needs to be reduced, but the EM would not make this decision because the economy of other member countries is booming. The EM would increase the interest rate or keep it unchanged, which is the opposite of what Country G needs.
Had Country G not been a part of the Uion EM and retained the country's own currency, then the country would have made changes in its monetary policy to alter the recession and get the economy back on track. However, Country G would implement fiscal policies offset the recession. The government of Country G would reduce the tax rate. Reducing the tax rate would increase the disposable income of individuals and their ability to spend would increase, which would, eventually, increase the demand for commodities and services helping the economy recover. Liberalization of labor laws would also increase labor productivity. If these fiscal policies would be implemented, then Country G would be able to overcome the recession.
Verified Answer
Country G, being a part of the Union EM, would not be able to implement monetary policies to overcome recession. The fiscal policies that would help Country G to offset recession is to reduce the tax rate and liberalize the labor laws.
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