AP Macro Unit 6: Open Economy - International Trade and Finance

Balance of … measures all international transactions in a year including exports and imports and the purchase and sale of …, like bonds.

Payments; assets

The value of one currency relative to a different currency is called the … rate.

Exchange

A … and … graph can be used to explain changes in the foreign exchange market.

Demand; supply

When a currency …, exports decrease because products become more expensive for foreigners.

Appreciates

When interest rate …, net capital inflow increase as foreigners buy more domestic assets, like bonds.

Increase

Balance of payments is made up of two accounts: the … account records net exports, income from abroad, and unilateral transfers and the … account records the international purchase and sales os assets.

Current; capital and financial

Net Exports (XN)

The difference between a nation’s exports of goods and services and imports of goods and services.

A trade … is when exports are greater then imports.

Surplus

A trade … is when exports are less than imports.

Deficit

A country’s currency … when the value increases relative to the value of a foreogn currency.

Appreciates

A country’s currency … when the value decreases relative to the value of a foreign currency.

Depreciates

Two currencies cannot both appreciates relative to each other at the same time. one must … and the other must …

Appreciate; depreciate

Four shifters of demand and supply in the foreign exchange market.

Preferences, Income, Price level, Interest Rates

A change in the … shifts both the demand and supply in the foreign exchange market.

Real interest rate

Increase in the real interest rate cause an increase in net capital inflow because …

When interest rate are higher, foreigners want to buy more domestic assets, like bonds, because they provide a higher rate of return.

Decrease in the real interest rate move a country’s capital/financial account (CFA) toward …

Deficit. A lower real interest rate would cause foreigners to purchase less domestic financial assets and decrease net capital inflow.