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Dr Raghuram Rajan, the Governor of RBI in a speech in july 2015 warned that the world was slipping into recession. The events in Greece justified what he said. The ratio of government debt-to-GDP was very high in case of Greece. (a) What in your opinion led to such an event as in Greece ? (b) Explain the chain effect. (c) What is the remedy for the above situation ? What economic value is highlighted here. |
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Answer» (a) High fiscal deficit was the root cause of the fallout in Greece - but could be true for other countries as well. (b) The chain effects are as follows `{:(" ""More borrowings"),(" "downarrow),(" ""Higher interest rates and more interest"),(" "downarrow),("Lesser amount with the government to be spent on development projects"),(" "downarrow),(" ""Low income"),(" "downarrow),(" ""Further borrowings/eventual debt-trap"):}` (c) The remedy is to contain/limit the fiscal deficit to a manageable limit (say `3%` to `5%` G.D.P.) The economic value highlighted here is fiscal discipline |
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