TEST EXAM PAPER

INTERNATIONAL ECONOMICS - A

Dec. 2023

Open book examination (Systime and Blink & Dorton + notes), but internet searching and AI etc. are
not allowed for this exam (and midterm & the final exam!).

This exam test paper consists of 3 main questions and 4 appendices (1, 2, 4 and 5). For grading
purposes, the questions are given the following approximate weights:

Answers must be written individually for each question and separated from one another (not one large
text section).

When you include appendix-info, please clearly state the appendix (appendix YY) you are referring to
for each question in a bracket.

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Please upload one final group-exam-paper-document in MNB/IE/Test exam paper Dec.2023 before
14.30 Wednesday! PLEASE SAVE THE DOCUMENT AS: TOPIC-SUBJECT-NAMES (ALL)-
CLASS!

Question 1: 30%

Question 2: 40%

Question 3: 30%

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Question 1:

A)
To calculate the negative population growth in Greece from 2011 to 2017, we can use the formula:

Using this formula, we can plot the information into Excel to illustrate the decline in population from
the given period.

Furthermore, to find the overall decrease in population in percentage, we can use this formula:
2017
Total growth rate= ∑ growthrate i ≈ 2 , 5 %
i

We can hereby conclude that the total decrease in population in 2,5% for the given period.

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B)
A decrease of 2.5% over six years is substantial, and it can, therefore, have various
economic effects both in the short-rug and long-run. The decrease is explained by the
economic crisis causing a decrease in birth rates (Annex 1).
With a decrease in the overall growth of the population, consumption patterns might be
influenced: with a smaller population, there may be a reduction in overall consumer
demand for goods and services. This could affect businesses, leading to lower sales and
potentially triggering a slowdown in economic activity. In events of a further economic
slowdown, the labour market might begin to feel a reduction in the availability this
might initially put upward pressure on wages. Since decrease in population stems from
the population having fewer children, hence having a smaller family, it may also lead to
a surplus of housing supply, which could put downward pressure on property prices. The
debt-to-GDP ratio may also experience a short-term increase as economic output
contracts more rapidly than the absolute level of debt changes. The overall economic
growth may decline in the short run due to the immediate impact of a shrinking
population that influences productivity, labour force, and consumer demand negatively.

In the long run, tax revenue might continue to be affected as the economy adjusts to a
smaller population, possibly leading to a restructuring of the tax system. This is because
long-term demographic changes may necessitate reforms to social security systems to
address social concerns. This might not be easy, because the tax revenue is less, due to
both the shrinking labour force, decrease in production, and a shrinkage in consumer
demands causing an economic slowdown. This all means that when tax revenue
decreases, government expenditure often follows. This is a problem for several reasons:
Since the birth rates have decreased, the future labour force will as well, thus the

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production will align, it is possible to combat this, with more skilled workers. Though
this might not be possible for Greece, since their tax revenue is at an immense decrease,
meaning that they are unable to do extensive funding of public services, such as
education and healthcare. Furthermore, if the labour force feels the reduction, the need
for unemployment benefits may arise, but this might also be a problem for the
government to fund. Lastly, the debt-to-GDP ratio may experience a short-term increase
as economic output contracts more rapidly than the absolute level of debt changes.

Question 2:

c.

A)
Based on appendix 2, we can clearly see that Germany has a stable effective interest rate
(EIR) with a slight decrease, while Greece has a fluctuating EIR with peaks and dips. A
stable EIR suggests economic stability and confidence in the government's ability to
meet its debt obligations. Investors may find a steady EIR more predictable and less
risky, which can be attractive for certain investors, such as pension funds or

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conservative investors. On the other hand, Greece has a more fluctuating EIR with an
immense peak in 2011-2012. At that time, Greece had accumulated a substantial amount
of government debt, and concerns about the sustainability of this debt grew. The debt-to-
GDP ratio was extremely high, and the country faced challenges in servicing its debt
obligations.

B)
In Appendix 5, it is stated that Greece's essential economic figures are at an all-time low,
making it more difficult for them to repay loans or assistance packages. Furthermore,
borrowing more than your real GDP is harmful to your economy. Consumption is also at
an all-time low, which means that money is not moving throughout the economy and
hence will not end up in the hands of the government to pay back debt. Also, as the
population declines, fewer individuals will supply to the economy, worsening the
problem and supporting the IMF's "non-sustainable" argument.
C)
Germany
Germany's economy showcases stability with a positive growth estimate rate of around
2.0% in 2018. The nation's diversified and export-oriented economic structure
contributes to its resilience, and continued global demand for German exports,
particularly in manufacturing, supports GDP growth. Private and public consumption
demonstrate moderate growth, indicating stable domestic demand. Robust gross
investment, especially in the construction and non-construction sectors, suggests a
healthy business environment. Strong export growth and a positive balance of payments
underline Germany's global competitiveness.
Low unemployment at an estimate of 3.7% contributes to a stable domestic market and
consumer confidence. Public finances, with a estimate at a decrease of 2.0% of GDP,

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indicate a relatively healthy fiscal position. Public debt, at 71% of GDP, remains within
reasonable limits.

Germany's economy is likely to benefit from a strong manufacturing sector and

continued global trade. Economic stability should support further investments and
domestic consumption.

Greece
Greece faced economic challenges, resulting in an increase in GDP from €181 billion in
2013, thus positive growth rate of 2.5% in 2018. This signals a potential recovery,
though significant challenges remain. Private and public consumption growth is modest,
indicating a cautious economic recovery. Gross investment growth is notable, especially
in non-construction, suggesting increased business confidence. Stock investment and a
negative balance of payments pose challenges for sustained economic growth. High
unemployment at 20.1% remains a significant concern for social and economic stability.
Public finances show a slight improvement, with a deficit of -0.2% of GDP, but public
debt remains high at 174% of GDP.

Greece's economic recovery is contingent on structural reforms, attracting investments,

and enhancing competitiveness. Efforts to reduce unemployment and manage public
debt are critical for sustained economic growth.
Question 3:

Based on your previous answers, appendices, IE-knowledge (and language) you should
give advice to the Greek Government, so they could apply economic policies to meet the
issues in the Greek economy (primary focus on the issues “demographic development”

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and “public debt”). You are only allowed to include 600 words in your “Government
economic advice paper”.

A)

To address the pressing issues of decreasing birth rates and the ensuing economic
challenges in Greece, targeted economic policies are essential. In response to the
demographic development challenge, the Greece government could implement short-
term and long-term measures to stimulate population growth and mitigate the adverse
economic effects.
To encourage family formation and combat declining birth rates, the government could
introduce temporary tax incentives for families with children. This would remove the
financial strain associated with raising children, making it more economically feasible
for families. By incentivizing having more than one child through cost reduction, the
government aims to reverse the trend of smaller family sizes, potentially mitigating the
surplus of housing supply and downward pressure on property prices.
Moreover, recognizing the long-term implications of a shrinking population on the labor
force, productivity, and consumer demand, Greece should explore immigration policies
aimed at attracting skilled workers. Strategic immigration could contribute significantly
to population growth, offsetting the demographic decline. Aligning immigration policies
with the country's economic needs will address potential labor force shortages and
support sustained economic activity.
Greece faces challenges associated with fluctuating Effective Interest Rates (EIR) and
essential economic figures at an all-time low. In contrast to Germany's stable EIR,
Greece's variable rates suggest economic instability and reduced investor confidence. To

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tackle this, the Greek government should adopt comprehensive measures to manage
public debt effectively and restore economic stability.
Implementing fiscal restructuring is neccesary to enhance tax revenue collection.
Despite the challenges posed by a shrinking labor force and economic slowdown,
reforms in the tax system can adapt to long-term demographic changes. This will require
a delicate balance between addressing social concerns, sustaining public services, and
ensuring fiscal responsibility.
A well-devised debt management strategy is crucial to controlling the debt-to-GDP ratio.
Negotiating favorable terms with creditors and exploring debt restructuring options will
be essential to ensure the sustainability of public finances. The government must
prioritize transparency and effective communication to bolster investor confidence,
demonstrating a commitment to meeting debt obligations and fostering a stable
economic environment.
Economic diversification is another key aspect to reduce reliance on specific sectors,
making the economy more resilient to external shocks. Encouraging growth in sectors
with potential and attracting investments will create new job opportunities, contributing
to overall economic stability.
Efficient use of assistance packages is paramount, with a focus on projects that stimulate
economic growth and job creation. Continuous monitoring and evaluation of economic
policies, guided by data-driven insights, will enable adaptive strategies to address real-
time economic indicators and changing demographic trends.
In conclusion, a multifaceted approach is necessary for Greece to navigate the
challenges of declining birth rates and public debt. Short-term measures, such as tax
incentives and immigration policies, coupled with long-term strategies including fiscal
restructuring, debt management, and economic diversification, will collectively
contribute to fostering sustainable economic growth and stability. The government's

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adaptability and commitment to addressing these challenges are crucial for the country's
economic recovery.

Appendices:

Appendix 1: The Greeks are becoming extinct (May 2017)

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Appendix 2: Effective Interest Rate on Government
Bonds in Germany and Greece (OECD 2017). Greece top
graph!

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Appendix 4 (no appendix 3!)

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