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AP Macroeconomics Unit 6: Open Economy: International Trade and Finance

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Unit 6: Open Economy: International Trade and Finance

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Question 1

Country A has a trade surplus with Country B. Which of the following is a likely explanation, all else equal?

A.Country A's currency is overvalued relative to Country B's.B.Country A's interest rates are much higher than Country B's, attracting large capital inflows.C.Country A's currency is undervalued, making its exports cheap for Country B.D.Country A imposes no trade restrictions, allowing free imports from Country B.

Question 2

If the U.S. runs a current account deficit, by accounting identity, what must be true?

A.The U.S. must also run a financial account deficit.B.The U.S. must run a financial account surplus (net capital inflow).C.The U.S. money supply automatically contracts.D.The U.S. must reduce government spending to restore balance.

Question 3

A country pegs its currency to the U.S. dollar at an overvalued rate. To maintain this peg, the central bank must:

A.Buy its own currency using foreign reserves, reducing domestic money supply.B.Print more of its own currency to satisfy excess demand.C.Lower interest rates to attract capital inflows.D.Raise tariffs on imports to reduce demand for foreign currency.

Question 4

Net capital outflows from the U.S. increase. What is the direct effect on the U.S. exchange rate and current account?

A.Dollar appreciates; current account surplus increases.B.Dollar depreciates; net exports and the current account tend to improve.C.Dollar depreciates; current account deficit widens.D.Dollar appreciates; net exports decrease.

Question 5

In the foreign exchange market, which of the following causes the supply of dollars to increase (shift right)?

A.U.S. residents increase purchases of foreign goods and assets.B.Foreign tourists increase spending in the United States.C.Foreign companies increase direct investment in U.S. factories.D.The U.S. Federal Reserve raises interest rates.

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Question 6

If the U.S. dollar–euro exchange rate changes from $1.20/€ to \$ 1.40/€, what has happened to the dollar and how does this affect a U.S. tourist in Europe?

A.Dollar appreciated; the tourist's dollars buy more euros, so European travel is cheaper.B.Dollar depreciated; the tourist needs more dollars per euro, so European travel is more expensive.C.Dollar appreciated; the tourist needs more dollars per euro, making travel more expensive.D.Dollar depreciated; U.S. exports become more expensive for Europeans.

Question 7

The exchange rate is 0.90 euros per dollar. If the dollar appreciates to 1.05 euros per dollar, what happens to U.S. exports and imports?

A.U.S. exports increase and imports decrease.B.U.S. exports decrease and imports increase.C.Both exports and imports increase.D.Net exports are unchanged because trade volumes adjust proportionally.

Question 8

In the foreign exchange market for the U.S. dollar, which event would cause the dollar to appreciate?

A.U.S. interest rates fall relative to foreign interest rates.B.Foreign investors increase demand for U.S. financial assets.C.U.S. consumers significantly increase imports from abroad.D.The U.S. current account surplus rises.

Question 9

In a flexible (floating) exchange rate system, a U.S. current account deficit tends to be self-correcting because:

A.The government automatically raises tariffs to reduce imports.B.The excess supply of dollars in foreign exchange markets causes the dollar to depreciate, making exports cheaper and imports more expensive.C.The central bank raises interest rates, reducing domestic spending and imports.D.Foreign countries reduce exports to the U.S. to balance bilateral trade.

Question 10

A nation runs a large government budget deficit. Using the open-economy loanable funds framework, what is the likely effect on the nation's current account?

A.Current account surplus, because government borrowing reduces domestic consumption and thus imports.B.Current account deficit, because higher real interest rates attract foreign capital, appreciate the currency, and reduce net exports.C.No change to the current account, because domestic saving adjusts to finance the deficit.D.Current account surplus, because the deficit reduces domestic investment, freeing up goods for export.

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Question 11

The current account of the balance of payments records which of the following?

A.A U.S. firm purchasing a factory in Mexico.B.A foreign investor buying U.S. Treasury bonds.C.U.S. exports of goods and services to foreign countries.D.Changes in official reserve assets held by the Federal Reserve.

Question 12

The U.S. Federal Reserve raises interest rates. Tracing the effects through the foreign exchange market: which of the following best describes the full chain of effects on net exports?

A.↑ U.S. interest rates → capital inflow → dollar appreciates → exports ↓, imports ↑ → NX decreases.B.↑ U.S. interest rates → capital outflow → dollar depreciates → exports ↑, imports ↓ → NX increases.C.↑ U.S. interest rates → lower AD → imports decrease → NX increases.D.↑ U.S. interest rates → dollar depreciates → exports ↑ → NX increases.

AP Macroeconomics Unit 6: Open Economy: International Trade and Finance — Free with Answer Explanations | Test Practice Hub