INDEX

S.N.O. PARTICULARS PAGE N.O.

1 INTRODUCTION

2 FISCAL POLICY

3 MONETARY PLOICY

4 NET NATIIONAL INCOME

5 CONCLUSION
 LIST OF TABLES

S.N.O PARTICULARS PAGE NO.

1 Basic economic facts

2 Germanys GDP

3 Germanys inflation rate-Forecasted

4 Basic element of BOP

Figure Headings Page No.

1 Employment Rate

2 Government Budget Balance

3 Effects of Fiscal Policy

4 Effects of Monetary Policy

5 Germany's Gross National Income over 2 year period

6 Inflation rate 10-year period

7 Rising Inflation in 2017

8 Germany's Money Supply

9 Unemployment Rate over 50 years

10 Unemployment Rate over 10-year period

11 Component of Current Account -Germany

12 Component of Financial Account - Germany

13 Current Account 10-year period

 INTRODUCTION
i
Germany is Europe's largest economy and most populated nation. European power struggles
immersed Germany in two devastating World Wars in the first half of the twentieth century
and left the nation occupied by the triumphant United forces of the US, UK, France, and the
Soviet Union in 1945.With the coming of the cold War, two German states were shaped in
1949: the eastern German Democratic Republic & the western Federal Republic of Germany.
The democratic FRG embedded itself in key Western economic and security associations, the
EC, which turned into the EU, and NATO, while the Communist GDR was on the cutting
edge of the Soviet-led Warsaw pact. The decay of the USSR and the end of the cold War
allowed the German reunification in 1990.Since reunification, Germany has grown extensive
funds to bring Eastern productivity and wages up to Western standards. furthermore,
Germany has taken a lead role in the EU and NATO (Germany sent a peace restoring force to
secure stability in the Balkans and sent a force of German troops to Afghanistan as a major
part of a NATO effort to provide security in that country after the ousting of the Taliban).

OVERVIEW
ii
Germany is a nation situated in the heart of Western Europe. It is bordered by Czech
Republic, Austria, Poland, Denmark, France, Austria, Switzerland, France, the Baltic sea,
Luxembourg, Netherlands Belgium, the North Sea. Germany has a strategic location on
North European Plain and along the entrance to the Baltic Ocean. The government system is
a federal republic; the head of state is the president, and the head of government is the
chancellor. Germany has a blended economic framework which incorporates variety of
private freedom, combined with centralized monetary planning and government regulations.
Germany is also a member of the European Union (EU).
The former West Germany has for many years profited from a high skilled population that
enjoys a high standard of living and an extensive social welfare program. Since unification,
however, Germany has witnessed the monetary challenges such as transforming the previous
East Germany from a depreciating command economy which was subjected on low-quality
heavy industrial products to a technologically advance market economy. Unemployment in
the east has remained reliably higher than that in the west, and although several larger urban
centres there have begun to revive financially, most German industrial cities remained in
depression Since the post-war years, the German economy has emphasised management-
labour consensus, which, while generally avoiding labour strife, has also created a relatively
inflexible labour environment where employers are unwilling to hire more than the minimum
required number of skilled employees, since it is difficult to fire them once they are hired.
Manufacturing and service ventures are the overwhelming monetary activities; farming
accounts for around 1% of the GDP (Gross domestic product) and involves around 3% of the
workforce. industries also include F & B (food and beverage) processing, shipbuilding, and
the manufacturing of iron and steel, chemicals, machinery and machine tools, automobile,
electronics, and textiles. Hard coal and lignite are mined. Generally speaking, the primary
German agriculture products are potatoes, wheat, grain, rye, sugar beets, cabbage, fruit, and
dairy products. Substantial quantities of cattle, pigs, and poultry are raised.
Germany is also one of the world's biggest exporters of products that includes machinery,
vehicles, chemicals, foodstuffs, and other different manufactures. Germany also imports
machinery, vehicles, chemicals, and foodstuffs. Its principle trade partners are France, the
Unified States, the Netherlands, Great Britain, and Italy.
The exports of merchandise are a fundamental part of the German economy and one of the
main factors of its wealth. As indicated by the World trade organization, Germany is the
world's top exporter with $1.133 trillion of export, from the earliest starting point of 2006
(Germany's export to other Eurozone nations are inclusive into this aggregate).
When it comes to generation of electricity from wind power, Germany top the list of nations.
Likewise, it is the main exporter of wind turbines. Although problems created by
reunification in 1990 have begun to disappear, the living standards remains higher in the
western half of the country.
iii
BASIC ECONOMIC FACTS:

GDP, PPP (current international) $3,848,271,845,006(2015)

GDP growth rate (annual %) 1.688%(2015)

GDP per capita, PPP (current international) $ 47,268(2015)

GDP country rank 5/193(2015)

Inflation, consumer prices (annual %) 0.234% (2015

External debt stocks, total (DOD, current US$) $466,463,000 (2011)

Total tax rate (% of commercial profits) 48.8% (2015)

Real Interest Rate (5 year average %) 22.047% (2012)

Manufacturing, value added (% of GDP) 22.572% (2015)

Current Account Balance (BOP, current US$) $285,074,316,184 (2015)

Labour Force, Total 42,207,318 (2014)

Unemployment Rate 5% (2014)

Imports of goods and services (current US$) $1,312,525,230,121 (2015)

Exports of goods and services (current US$) $1,574,493,734,058 (2015)

70.399% (2014)
Total Merchandise Trade (% of GDP)

FDI, net inflows (BOP, current US$) $46,227,109,664 (2015)

Commercial Service Exports (current US$) $272,317,237,807 (2014)

FISCAL POLICY
iv
Fiscal policy states the way a government adjusts its expenditure levels and monitors tax
rates and influences a nation's economy. It is a sister strategy to monetary policy by which
a central bank influences a nation's money supply. Fiscal policy is based on the theories of
British economist John Maynard Keynes that states that the government can influence
macroeconomic productivity levels by increasing or decreasing tax levels and public
spending which in turn curbs inflation, increases employment and maintains a healthy value
of money.
Before Great Depression that lasted from Sept. 4, 1929 to the late 1930s or early 1940s, the
government's approach to the economy was laissez-faire. Following World War II, it was
determined that a proactive role had to be taken in the economy by the government to
regulate the rate of unemployment, business cycles, inflation and the cost of money. By using
a mix of monetary and fiscal policies, government is able to control economic phenomena.
v
In 2010, Germany cut 14 million euros in taxes as decided by the active government
coalition of Christian Democrats and Social Democrats. In 2011, they expected to cut 24
million euros in pay charges profiting specifically low-and middle salary workers and in
addition families. There are still many subtle elements to go into this arrangement, yet
Germany will likely cut income taxes tremendously. This states an expansionary fiscal policy
as Germany is decreasing the taxes.

Germany is fixated on the black zero at the cost of lower development:

The German federal government achieved a fiscal surplus in 2015 for the second year in a
row, which levelled the German government, recorded surpluses and raised the governments
budget surplus to 0.7%.Thus has fiscal space to stimulate the economy by investing in
outdated (digital) infrastructure and education. An opportunity to introduce labour market
reforms by extension of the pension age and immigration into the workforce and the sclerotic
services sector. This raised the growth potential by increasing the countrys productivity
growth and the labour force. The positive spill over effects the fiscal stimulus on other euro
zone countries as well. viThere was a reason to assume that the country will change its course
after years of complacency and lack of reforms in the view of upcoming federal elections and
a political obsession with the black zero i.e. budget balance. The government also used
some of its fiscal buffer to accommodate the recently arrived immigrants.
Effects Of Fiscal Policy:
vii
Fiscal policy changes will have both price and income effects for exchange rates and
balance of payments.
Effects with regard to the price effect:
Government budget deficits which were a result of the tax cuts or increased spending
which will increase the demand for investable funds that would increase interest rates
to.

There will be capital inflows as foreigners will purchase more domestic financial
assets which further will result in strengthening the capital accounts.

Increase in the demand for the domestic currency will lead to increase in its exchange
rate.

With no government intervention in the balance-of-payments, the current account will

become more negative. The trade balance weakens as imports increase and exports
decrease. The strengthening of the domestic currency will make its exports less
attractive to foreigners and imports less expensive relative to the country's consumers
and domestic businesses.

Effects with regard to the income effect:

The tax cuts and increase in government spending will increase the GDP.

The rise in GDP will increase the demand for imports and the current account will
weaken.
 The increase in the supply of domestic currency on the international markets will
lower the exchange rates.

With no government intervention, the financial account will have to compensate the
weakening of the current account. Foreigners will have more of the domestic currency
so will purchase and invest more.

Stimulation of fiscal policy weakens the current account (balance of trade) and
strengthens the capital account whereas the restrictive fiscal policy strengthens the current
account (balance of trade) and weakens the capital account. The fiscal stimulus causes the
domestic currency to appreciate. As the demand for imports gets stimulated the domestic
currency weakens. The fiscal stimulus will worsen the balance of trade and increase the
financial accounts in both the short and long run. A simulative fiscal policy is beneficial
for the economy when it is functioning below full employment levels a couple of factors
mitigate the positive effects like the government deficits which work to increase interest
rates. Another factor is that after the inflow of foreign capital the domestic currency
exchange rate rises due to high interest rates which leads to increase in imports that
reduces GDP.

The expansionary policy made the objective to close a recessionary gap, decreased the
unemployment, and stimulated the economy. By reducing taxes an opportunity was created
for the economy to adjust itself at the same time government spending could create new
jobs. With more number of jobs and less taxation on income, the contribution resulted
towards closing the recessionary gap and stabilization of the economy. Its own currency and
a floating exchange rate, the current account imbalance disappeared. Even in the monetary
union, a large imbalance would not matter if it was politically integrated and had a common
fiscal policy. But imbalances mattered in the monetary union, one without redistribution and
reinsurance systems. Germany rejected the redistribution mechanisms that are how it
maximised its current account surplus as it constituted an implicit policy goal.
When inflation is at a high point, the economy may need to slowdown. In such a case the
government uses fiscal policy to increase taxes to pull out money from the economy. The
policy may also dictate a decrease in government spending and thus a decrease in the
circulation of money. The possible negative effects in the long run is a sluggish economy and
high levels of unemployment, so as the process continues, the government uses its fiscal
policy to maintain its spending and taxation levels, with the objective of evening out the
business cycles.

Fiscal stimulus serves Germanys interest:

viii
The government avoided to end its attachment to thrift and do more to support domestic
demand. There are indications that Eurozones largest economy is rebalancing the growth in
exports that had slackened and the consumer expenditure is increasing at a fast rate. Despite
it being a welcome development, the domestic upswing owes a small proportion to
government policy. After decades of pay restraint wherein earnings increased at a slower
pace than productivity, workers enjoyed wage growth above inflation. The fall in oil prices
helped household budgets as the need for people to dig into their savings in order to spend
more was no more a concern. Employment level increased with the number of people in the
workforce, which was highest since the reunification and this lifted consumer confidence to
its highest level since 2001.ixThere was also a modest boost from fiscal policy. Although the
finance minister Wolfgang Schuble remained intended on running a balanced budget, rising
tax revenues that made this commitment to the black zero compatibility with higher
refugee-related spending and an increase in social transfers and modest tax cuts.
However, the consumption boom owed far more to the stimulus delivered by the European
Central Bank than it did to the domestic policy. This was a strange inversion of the pressure,
as the government decided to cut down the taxes and tightened the purse-strings afterwards.
Both the politicians and the public believed in the need to practise the austerity that had been
imposed on the EUs indebted margin. There was a little reason to delay the fiscal stimulus
apart from the self-imposed constraint of running a surplus. Despite the reports of crumbling
bridges and ageing railways, infrastructure remained a huge national strength, but would
remain so only if the money is made available to maintain it.
Moreover, there were certain other areas in which risks fall behind, for example: in internet
connection speed and other aspects of digital infrastructure. A well-directed fiscal stimulus
would not only aid the Eurozone recovery but also most importantly would be in Germanys
best interests.

MONETARY POLICY
x
Monetary policy portrays the actions of a central bank, currency board and other regulatory
committees that determine the size and the growth rate of money supply, which in turn
affects the rate of interest. It is maintained by modifying the interest rate, buying or selling of
government bonds and securities, and changing the amount of money the banks require to
keep in the reserves.
The two types of monetary policies are:
(a)Expansionary monetary policy: increases the money supply to lower the level of
unemployment, boost the borrowings and consumer spending of the private sector
and stimulate the economic growth. Also known as easy monetary policy", the description is
applicable in many central banks since the financial crisis of 2008, as interest rates lowered
and came down to zero.
(b)Contractionary monetary policy: slows the growth rate of the money supply and decreases
the money supply in order to control inflation, increases the level of unemployment and
depresses borrowings and spending by consumers and businesses. This resulted in recession,
but kept spiralling the inflation in check.

Monetary Policy in Germany:

xi
Germany not having its own money couldnt use their own monetary policy so it decided to
abide by what the ECB (European Central Bank) quoted, which intended to raise the rate of
interest to 1.5% by the end of the year. The ECB was signalling not to let the inflation
expectations rise, although in reality headline inflation was expected. The Bundesbanks core
interest of business is monetary policy. In cooperation with the European Central Bank
(ECB) and the other euro-area central banks which together constitute the Euro system .The
Bundesbank has the power to maintain price stability.
A stable currency being the foundation of a healthy economy protects the savers and income
earners from the erosion of wealth while focussing on promoting growth and employment.
The price stability is defined to be as an increase in the euro areas average price level of
below but close 2% compared to the previous year. The monetary policy measures helped the
Euro system in an indirect way to influence the general price developments. It changed the
cost at which commercial banks could obtain cash and credit from the Euro system by
altering the key interest rate. And thus it influenced both the interest rates at which
commercial banks lend money to each other and credit conditions for households and
enterprises. As the level of lending rates usually plays an important role in purchasing and
investment decisions, the measures affects aggregate demand and the price developments.
The Euro system had instruments like open market operations, relying to which the central
banks gave money to commercial banks in return of collateral for a certain period of time.
Bundesbank played a major role in settling the refinancing the operations as well as in
inspecting and managing the collateral and also provided with the information on the
monetary policy.

Effects of Monetary Policy:

xii
Unanticipated changes in monetary policy will have effect on both price (substitution) and
income.
Effects with regard to the price effect:
Real interest rates will go down.

With reduction in the interest rates the domestic financial and capital assets become
less attractive mainly because of their lower real rates of return. Foreigners will limit
their investment in domestic bonds, real estate, stocks and other assets because of
which the financial accounts will deteriorate. Domestic investors in pursuit of higher
rates of return will also invest overseas. This further will decrease the demand for the
domestic currency and increase the demand for the currency of other countries i.e.,
there will be a decline in the exchange rate of the nation's currency.

The financial and current account must add up to zero, with no government
intervention. With the decline in the financial accounts, the current account will
improve by an equal amount i.e., the balance of trade improves. The country's imports
will be more expensive whereas the exports will tend to be cheaper.
The effect of an expansionary monetary policy is to lower the exchange rate which weakens
the financial account and strengthens the current account. A restrictive monetary policy
would give an opposite expected result which comprises of an increase in the exchange rate,
a much stronger financial account and relatively a weaker current account (a more negative,
or a less positive balance of trade).

Effects with regard to the income effect:

The domestic GDP rises.

The demand for imports rises with the rise of GDP, which will result in the
deterioration of the current accounts.

Conversion of domestic to foreign currency increases because of the increase in the

imports, which results in the decrease in the exchange rate of the domestic currency.

Zero government intervention triggers the financial accounts to move towards surplus
as the financial and current accounts sum to zero. This will further result in foreigners
having a share in the surplus of the domestic currency. If foreigners do not use that
currency to purchase the countrys exports which would improve the current account
balance, they will have to invest that currency in the assets of the domestic country.

xiii
The income effect of expansionary monetary policy tends to lower the domestic currency
exchange rate, weakens the current account and works to improve the financial account. A
restrictive monetary policy tends to cause the opposite due to the income effect. The
exchange rate of domestic currency increases, the current account improves and the financial
account weakens. As both price and the income effects of monetary policy move in the same
direction in respect of their impact on the exchange rate, the expansionary monetary policy
lowers the domestic exchange rate. The investors can buy and sell stocks and bonds more
quickly in comparison to the producers and consumers. The increase in the money supply
lowers the exchange rate, the financial account gets weakened and the current account gained
strength. A rising GDP will weaken both the trade balance and financial account.
Monetary policy creates cyclic movements that destabilize the economy. Also, unanticipated
expansionary monetary policy improves the trade balance, but over a period of time it makes
the trade balance negative which weakens the capital account to lower interest rates, but then
at a later stage it tends to improve it. The main effect of the expansionary monetary policy is
the international equivalent to the long-run effect of expansionary monetary policy, inflation.

This rise in the rates of interest will not only affect Germany, but also the rest of the world involved in the ECB.
This resulted in unstable prices, alteration of many costs of living, making it harder to get approval for loans
and other such borrowings. It increased the cost of borrowing, increased the income payments from mortgage,
increased the incentive to save rather than to spend, high interest rates affect both consumers and firms, and the
government too as debt interest payments increase.

ihttps://www.uniulm.de/fileadmin/website_uni_ulm/mawi.inst.150/lehre/ss11/isp/Germany_an_Introduction_2011.pdf
ii http://globaledge.msu.edu/countries/germany
iii http://globaledge.msu.edu/reference-desk
iv http://www.roubini.com/critical-issues/62084?parent_briefing=49792
v https://www.ft.com/content/3953dc92-7f1f-11e6-8e50-8ec15fb462f4
vi http://www.investopedia.com/articles/04/051904.asp

viihttp://www.amosweb.com/cgiin/awb_nav.pl?s=wpd&c=dsp&k=contractionary+fiscal+policy
viii http://economics.about.com/cs/money/a/policy2.htm
ix http://www.roubini.com/critical-issues/62084?parent_briefing=49792
x http://agmetalminer.com/2010/06/29/soros-highly-critical-of-german-monetary-policy/
xi http://www.investopedia.com/exam-guide/cfa-level-1/global-economic-analysis/monetary-policy-exchange-balance-

payments.asp
xiiwww.economicshelp.org/macroeconomics/monetary-policy/effect-raising-interest-rates.html

xiii https://www.bundesbank.de/Navigation/EN/Tasks/Monetary_policy/monetary_policy.html