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Game Theory Explains Why the Economy isn’t Improving

There is an economic crisis in Europe right now. Greece is very likely to default on its debt, and their main creditor, Germany, is making contingency plans if Greece defaults (Bloomberg). If Greece fails, an economic disaster in Europe is likely to ensue, and the value of the Euro would drop drastically. Consequently, the Euro cannot exist in its current state; there must be changes to the current structure in order for it to work. The restructuring will not involve the European Union breaking apart because the costs are extremely high compared to the cost of bailing out Greece and the other debt laden countries.

Game theory explains why the economy is in its present state. Right now consumers do not want to spend because companies do not want to higher. Likewise, producers do not want to higher because consumers are not spending. This is a Nash Equilibrium each player’s strategy is a best response to the other’s strategy. The other Nash Equilibrium is when consumers spend and companies higher. However, shifting the economy into the better scenario is not as easy as it seems. Consumers are unwilling to spend because many of them have a lot of debt. The government cannot change the equilibrium to consumers spend and companies higher until the consumer debt problem is fixed.

Article referenced: Preparing for a Credit Crisis http://seekingalpha.com/article/292871-preparing-for-a-credit-crisis

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