No doubt Memcache in GAE can improve speed performance, but isn't that
something that can be hidden from application developers? GAE could
automatically cache things like results for datastore queries in a for
application developers transparent way, i.e. I as an application
developer would then only have to write code for making say datastore
queries and not have to bother about caching and other system-level
performance issues which will be taken care of automatically by the
App Engine behind the scene.

Not only would the application code be cleaner. The caching and other
performance optimizations could be done 'optimally' by the Google App
Engine team who work directly with the server-side system-level code.
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