1. This question is based on the article, "The German economy: Clouds ahead", published by The Economist on June 7, 2014.

(a)According to the article, German labor market has done well since the second half of 2000s. What are the two main reasons given by the article for this outcome? Please support your conclusions with appropriate quotations from the article. [10]

Answer:

(b)The article points out that Germany has been under-investing between the early 2000s and early 2010s. What evidence does the article present for Germany's under-investment in that period? [5] According to the article, what are the likely consequences of low investment for productivity growth in the German economy? [5]

Answer:

(c)According to the article, what role has the government played in Germany's under-investment? [5] What is the likely impact to this aspect of government policy on Germany's long-run real exchange rate, based on the model(s) of exchange rate determination discussed in Module 6? [5]

Answer:

(d)The article claims that Germany's services sector requires an array of reforms. If the proposed reforms are implemented and those reforms end up raising the productivity of Germany's service sector, what would be the impact on Germany's competitiveness vis--vis its trading partners? Please make sure to explain the mechanism that supports the answer you provided. [10]

Answer:

2. Extra Points Question: Major oil reserves were discovered in Ghana in 2007, which led to a windfall revenue for the government after 2011. The windfall has enabled the government of Ghana to increase its expenditure in the economy significantly. Suppose the Central Bank of Ghana had pegged the country's currency, cedi, to the dollar since 2000 and the price level in the economy had remained constant until 2011. Also, for the sake of simplicity, assume that the aggregate price level among Ghana's trading partners had remained constant since 2000. In that context, what would have happened to the price level in Ghana after 2011 as a result of the long-term increase in government expenditure? [10]

Answer: