Quang Anh

S3926813

Ms. Pham Thi Thu Tra

Macroeconomics

Assessment 3: Economic Policy Discussion

Country of Choosing: Germany

Question 1:

Figure 1: Germany economic snapshot, (worldfactbook, 2020)

Figure 2: Germany’s GDP Growth Rate (2002-2022), (macrotrends, 2022)
 Figure 3: Germany’s inflation rate (2002-2022), (macrotrends, 2022)

Figure 4: Germany’s Unemployment Rate (2002-2022), (macrotrends, 2022)

Tools Adopted:

During the 2008 global financial crisis, Germany’s economy took a huge turn as their real
GDP started plummeting as a result of loss of liquidity in the global financial market (M Schwirtz,
2019). The collapse of the US housing market negatively affected the global economy as the
trading came to a halt. Germany’s GDP growth rate met its peak in 2006 with 4% GDP per capita
which later fell to -6% in 2009 as the country couldn’t export their goods. Fortunately, they saw
a quick recovery as their economy was thriving again in 2010 with a growth rate of 4%, equaling
their record in 2006 (Figure 1).
Although many countries were heavily impacted with high unemployment rates, it
wasn’t as bad for Germany. Although the rate increased in 2009, it steadily recovered the year
after and saw a steady downward slope up until the Covid-29 pandemic (Figure 3). 2008
recorded the highest inflation rate since 1994. Ironically, the rate fell down to its lowest in 2009,
resulting in the lowest rate in 20 years as a result of the global financial crisis (Figure 2).

The financial recession decreased consumer spending due to wage restraints and
increase in unemployment rate. This caused many firms to lose money as the demand for their
products/services were low. Similarly, their export status shared the same outcome as it was
declining at a rate of -19% GDP per capita. Due to the tense situation, the government had to
implement two tools which were increase on government spending and tax cut in hopes of re-
stabilizing the economy and the GDP growth rate (A Wirtz, 2020). They increased government
spending on security infrastructures and applied tax reductions with the goal of encouraging
personal consumption from their citizens as well as boosting the export level (S Haller, 2018).
The stimulus package played a huge role in increasing export demand, which led to an increase
in investments, resulting the fall of unemployment rates hence causing the consumer demand
to rise.

Was it Successful?
 Figure 5: Change in Net Export and Consumer Spending during Global
Financial Crisis Shifts AD Curve from Point A to B.

Figure 6: AD/AS Graph after Government Takeover

According to the AD/AS graphs shown above, we can observe how beneficial the
German government’s stance was to their economy during the financial crisis. The net export
and consumer spending figures dropped dramatically in 2009, resulting in the AD 1 curve to
recess from point A to B, giving us the new curve AD 2 (Figure 5). However, after implementing
the two tools (government spending & tax cut), it allowed the economy to rebound in a swift
fashion by shifting our curve upwards; hence creating AD 3 (Figure 6). Overall, it is evident that
the stance taken by the German government was a success. It laid out a stable economic
foundation with the goal of setting a clear path for the year after. All that said, one can certainly
argue that it deserves more credit than it did.

Question 2:
Use of Fiscal Policy:

Increased public investment is the federal government's fiscal policy goal for 2019.
Germany's development potential will be boosted by investments in infrastructure, education,
and research (FFI, 2019). Due to aid care for the Covid-19, German government expenditure
surged by nearly 10 billion euros between pre-epidemic years (Dec 2019 and Dec 2021). To solve
the Covid-19 issue, the government has passed three supplemental budgets (V Basten, 2020).
Furthermore, Germany's taxation in 2021 was similar to that of pre-epidemic years. In 2020,
however, there was a huge decline of about 100 billion euros (DW 2020). The stimulus package
comprises a temporary VAT reduction in addition to interest-free tax deferrals until the end of
the fiscal year. By applying the output multiplier to Germany’s economy, we can see that the
increase of government spending and tax reduction had led to the net export and consumer
spending to rise, all except for investments.

Impacts of Policy Change:

Before Fiscal Policy Implementation

After Fiscal Policy Implementation

 Before the fiscal policy was applied by the government, the export and consumer spending levels
plummeted. By incorporating both government spending and tax cuts, fiscal stimulus programs were
available to assist the people. This brought a positive impact among the country’s overall financial status
as every citizen received proper income to aid from. This played a huge role in maintaining the
unemployment rate as the consistent salary for everyone prevented the rate from increasing. Looking at
the AD/AS graphs above, we can understand that the financial crisis brought down both the prices and
quantities for all products/services. Fortunately, with the assist of the fiscal policy, the multiplier effect
helped the net export and personal consumption levels to rise.

Cushion Covid-19 Impacts:

The fiscal policy would be appropriate during the Covid-19 pandemic as every government would
be able to help their citizens along with stabilizing the economy. Germany along with numerous countries
applied this policy and gave out millions of stimulus packages in order to aid their people; especially ones
that lost their jobs (R Folabi, 2021). Since the government is using the country’s reserves to help their
people and the nation’s overall status, this would help stabilize its economy for at least a year.

Compare and Contrast:

When comparing how the fiscal policy performed between the great recession and the Covid-19
pandemic, we can see the likeness from the two events. The economy was struck hard during these two
events, plummeting the global financial market. Stimulus packages were also given out during both
events, helping billions of people from starvation and homelessness (A Rondon, 2019). However,
unemployment rates increased, making these two events the greatest financial crisis of the 21 st century.

Question 3:

Inflation Data:

Figure 8: Germany’s Inflation Rate 1991-2021, (macrotrends, 2021)

 Figure 9: Inflation Rate Tabulate, (macrotrends, 2021)

Causes of Increase Inflation Rates: