a. The Greek crisis began when the government borrowed more money that they can repay, so the Greek crisis is a debt crisis. The Greek debt crisis originated from the Greek’s government wasteful and excessive expenditure; especially in public workers’ salaries and overgenerous pension plans. As a result, Greek’s economy became week, corrupt, and incompetent, so the Government had to resort to a massive debt just to function. Debt-to-GDP ratio skyrocketed, which translating in the collapse an subsequent crisis of Greek’s economy.
b. To solve this, we are going to use the standard decay function
where
is the final amount remaining after
years of decay
is the initial amount
is the decay rate in decimal form
is the decay factor
is the time in years
I will tell Greece to cut their expending by 25%
To find our decay factor
, we are going to convert the rate from percentage to decimal; to do it, we are going to divide the rate by 100%
Decay factor =
Decay factor =
Decay factor = (0.75)
We can conclude that our decay factor is (0.75)
c. To solve this, we are going to use the standard decay function
from our previous point.
where
is the final amount remaining after
years of decay
is the initial amount
is the decay rate in decimal form
is the decay factor
is the time in years
We know from our problem that the initial debt in 2009 was $500 billion, so
; we also know fromm our previous calculation that our decay factor is (0.75), so lets replace those values in our function:
We can conclude that the function that model this debt situation is:
.
d. Greece will be debt-free when heir debt is zero. Translating this into our model, Greece will be debt-free when
. Since we will need logarithms to find the time
, and the logarithm of zero is not defined, we are going to use a small value for
, so we can use logarithms to find
.
Let
. After all, a $1 debt for a country is practically the same as being debt-free.
Now, we can solve for
using logarithms:
We can conclude that, with me in charge, Greece will be debt free after 93.6 years. I won't reconsider my answer
b. Even tough 93.6 years is a lot of time, cutting the public expense more than 25% will have worse consequences for the economy of the country than the debt itself.
