You have been hired as a researcher by the OECD to write a short paper on the macroeconomic effects of austerity economic policies applied during the recent Eurozone crisis. You are required to:
a) Briefly explain the economic rationale behind austerity economic policies (1-2 paragraphs max).
b) Within the context of the Eurozone, use the IS-LM and AS-AD models to show the effects of austerity economic policies in an economy. Austerity economic policies refer to fiscal policies implemented by member countries. However, equal weight should be given to the monetary policy in the Eurozone which is implemented by the European Central Bank, so don’t forget to also include/discuss in your analysis the ECB’s role and policy/ies.
c) Discuss whether austerity economic policies eventually achieve their goal/s drawing from your macro analysis and from the available data and literature (i.e. journal papers). Discuss whether austerity economic policies result in more negative macroeconomic effects than positive ones or vice versa. Can you provide an alternative solution, using the macro models we cover in this module, instead of austerity?