How the size of the multiplier effect
Course:- Macroeconomics
Reference No.:- EM13866372

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After the financial crisis in 2007 and amidst very slow growth, Slovenia entered in a period of fiscal consolidation (or austerity), to reduce the debt burden that was mainly created by bailing out its banks.

The austerity measures includedthe introduction of new taxes, the reduction of expenditure, and the privatisation of 15 state-run companies including the country's second-largest bank, Nova Kreditna Banka Maribor (NKBM); communications operator Telekom Slovenija; airline Adria Airways; Ljubljana airport and Elan ski manufacturer.

You are asked to analyse the economic situation in Slovenia since the financial crisis, the effects the austerity measureshave had and may have on the economy, and provide a recommendation to future policy makers.

Alternatively, as discussed in class, you are free to evaluate the austerity programme of another country of your choice, following the same structure as below.

Task details and marking grid

1. By way of introduction, provide a short overview of the Slovenianausterity programme, and the justification that was given for it.

2. Shortly describe, using diagrams, equations and text, the equilibrium level of national income in the Keynesian Cross, the IS/LM model and the AD/AS model.

3. Shortly describe, with reference to the Keynesian Cross, the multiplier effect and automatic stabilisers.

4. Making extensive use of academic literature, explain

• how the size of the multiplier effect could be determined by factors both in the goods and the financial market.

• how the size of the multiplier effect could differ across fiscal measures, i.e. different tax- or spending measures.

5. Using above descriptions and explanations, discuss the effects of austerity programmeson public debt, economic growth and unemployment.

• Take into account that governments are faced with high debt levels and low growth at the same time.

• Form a view on the short- and the long run.

• Use theoretical and empirical academic and reputable business literature as sources to form a view and form your argument.

6. Conclude: Was it advisable forSlovenia to conduct a policy of austerity measures during times of slow growth, should it have delayed its austerity measures, or should it have turned to stimulation (i.e. expenditure) policies?

• The conclusion must be clearly your own.

• Your conclusion must be based on above discussion.

• Take into account the short run and the long run, and all stakeholders in the economy.

7. Acknowledge all your sources fully and according to Harvard style.

8. Write a coherent academic report. Format your report appropriately and professionally with a title page, contents, page numbers, and clear tables and diagrams with titles, numbers and sources.

Word count: 2,500 words

Format requirements:

- Write a coherent academic report; do not answer question by question.

- As the homework is to be submitted electronically all diagrams need to be created electronically, too.

- All figures and tables must be fully labelled, numberedand have a title.

- Please use MS Word's Equation editor to create equations.

- Have a title page and a contents page, and separate lists of tables and figures.

- All sources must be acknowledged according to Harvard style. The references in this text and the reference list below follow this style.

- Do not forget page numbers.


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Table of Contents
Introduction 3
Objective of the paper 3
Austerity measure in Slovenia 4
Austerity measure was not popular in Slovenia 5
The role of automatic stabilizer 5
A KEYNESIAN Cross diagram model: 6
Multiplier effect 7
IS LM model 9
AD – AS model 10
The debate on fiscal stimulus and austerity measure 12
Impact of Austerity program in Slovenia 12
Recommendations and Conclusion 14
References 15


Slovenia was a small buy the one of the fastest growing economy in Euro zone countries in 2007 that exports nearly 7-% of its production. But it was one of the worst hit by the economic crisis of 2008 and struggling to cope up. After experiencing a mild recovery in the year 2010, the nation has again struggling with a new recession.

The current economic crisis and financial crisis leads to a huge macroeconomic imbalance, a sharp contraction of major economic activities and a mounting debt to all the European Union countries. Slovenia is also of no exception. Enhancing the macroeconomic balance by ensuring sustainability of the public finance becomes the current priority for most of the European nations. Fiscal sustainability of public finances is the primary concern now (StanislavaSetnikarCankarVeronika Petkovšek.2014).

Slovenia was in a deep recession for long with devastating consequences. The economy contracted in consecutive quarters and the government deficit has increased to a significant extent. According to International Monetary Fund, the government deficit was only 22% in 2008 but gradually it has increased to 52% of GDP by the end of 2012.

As a part of austerity measure Prime Minister Jansa planned to further cut in social benefits, pensions and salaries of the public employee. The key aim was to bring the current deficit to 3 percent from the current level of 4.2%.

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