DEBT CRISIS 2010-2011

Debt Crisis 2010-2011



Debt Crisis 2010-2011

Introduction

Debt crisis of 2010-2011, shows that the United States does not spare the European Union and a gradual decrease in ratings of the euro zone lead it to increased interest that have to be paid to security holders, which as a result makes debts unmanageable leading to the debt crisis. Reduction rating of the euro zone government forces urgently seeks funding to keep the budget under control, and actively carry out unpopular measures to cuts in social spending. A similar impact on governments in the euro area has reduced ratings of commercial banks. The authorities hastily subsidize troubled banks, which complicates matters budgets. In 2010-2011, the European governments have tried to keep the debt from sprawl. However, the development of debt crises or their premises has been provided by economic problems and the announcement of the end of the global crisis has not followed the economic recovery and revitalization of the world economy was not enough (Wearden, 2011).

It is also important that the actions of these powers to "resolve the crisis the euro area," aimed only at preserving it under control. Debt relief of the euro zone, from 20% to 60%, the EU is seen as too expensive and threatening recurring scenario. Characteristically, for writing off half of the Greek debt followed by the decision of the New Greek government on the allocation of various forms of banks 60 billion Euros (Nicolas & Firzli, 2010, 17). They promised to compensate for losses from writing off their banks and other governments in the euro zone. Write-off of even a small portion of the debt of a state euro zone invariably requires substantial costs for which the authorities do not have the necessary funds. The analysis of the Debt crisis is done for my client, which is a small European open economy that is not in the euro zone and has a floating exchange rate. This economy conducts nearly 60% of its international trade with the euro zone, is not in recession and has balanced trade.

Mundell-Fleming Model

The Mundell-Fleming was developed in the early 1960s by Economists Robert Mundell and Marcus Fleming. It is an extension to an open economy model of the famous Keynesian macroeconomic equilibrium: the IS-LM diagram, proposed in 1937 by Richard Hicks and Alvin Hansen. Mundell-Fleming discusses the simultaneous equilibrium in the market for goods and services and those of the Monetary and Exchange (Mankiw, 2010, 101). It also allows the analysis under different exchange rate regimes, the impacts of policy alternatives and the macroeconomic production of a country's interest rates and exchange rates. The Mundell-Fleming model assumes perfect capital mobility and anticipation static future exchange rate from the investors. It details the assumptions of Keynesian downward rigidity of prices and wages and the possibility of underemployment equilibrium factor production due to a lack of demand for goods and services.

In a system of floating exchange rates, e is allowed to fluctuate in response to changing economic ...