AP Macroeconomics Unit 8 MCQ Test

What is an open economy?

An economy that trades with other economies

What is a trade surplus

When a country exports more than it imports in price value

What is a trade deficit

When a country imports more than it exports in price value

What is a trade balance

The difference between the value of goods and services one country sells to other countries and the goods and services it buys in return

what transactions occur in the current account

imports and exports of goods

What transactions occur in the financial account?

imports and exports of financial assets

What is the balance of payments account?

The summary of all transactions with other countries, including both current account and financial accounts

What is a deficit in the current account?

A trade deficit and a surplus in financial account. Can pay for imports by selling assets to foreigners

What is a deficit in the financial account?

Other countries have a surplus over a country in trade of financial assets. There is a surplus in current account (trade surplus)

What is the balance of payments in the current account and financial account?

Inverse relationship: CA = -FA

What is an exchange rate?

The relative price of currencies between countries

What is the name of the market where currencies can be exchanged for reach other?

Foreign exchange market

What are the effects of tariffs for exchange rates?

Tariffs cause a decrease in demand for a currency, causing that currency to depreciate.

What are reasons demand can shift right for a currency

• Higher interest rates

• Increased tourism

• Being seen as an attractive investment opportunity

• Products wanted by foreign citizens

When does a currency appreciate and what are the effects on imports and exports

• If demand for a currency shifts right or supply for that currency shifts left, then the currency appreciates

• Imports increase

• Exports decrease

• Net exports decrease

• AD shifts left

When does a currency depreciate and what are the effects on imports and exports

• If demand for a currency shifts left or supply for that currency shifts right, then the currency depreciates

• Imports decrease

• Exports increase

• Net exports increase

• AD shifts right

What is the effect of a currency appreciating or depreciating on current account and financial account?

If a currency appreciates, its balance of payments on the current account will fall and its balance of payments on the financial account will increase

What is purchasing power parity?

The nominal exchange rate which a market basket would cost the same in each country

What is the difference between nominal exchange rate and real exchange rate?

Nominal exchange rate is the exchange rate not adjusted for inflation. The real exchange rate is the exchange rate adjusted for inflation.

What is exchange rate regime?

The rule that governs a country’s policy toward its exchange rate

What is a floating exchange rate?

An exchange rate determined by the market

What is a fixed exchange rate?

An exchange rate set by government policy.

What are advantages of a floating exchange rate?

A country retains the ability of monetary policy to stabilize the economy and it tends to be insulated from economic fluctuations in other countries

What are advantages of a fixed exchange rate?

It eliminates uncertainty about the value of a currency

What is an issue of keeping a fixed exchange rate?

It prevents monetary policy from being used to achieve other goals.

What issues arise if a government tries to fix an exchange rate above market equilibrium?

There will be a shortage of the currency which will cause the currency to rise (appreciate).

What issues arise if a government tries to fix an exchange rate below market equilibrium?

There will be a surplus of the currency which will cause the currency to fall (depreciate).

How can a government adjust a fixed exchange rate above or below market equilibrium?

The government can buy some of its own currency if their currency is depreciating and it can buy some of another currency if their currency is appreciating.

How does devaluation or revaluation of a currency occur and what its effects are on imports and exports

• Devaluation and revaluation of a currency both only happen under fixed exchange rates.

• Revaluation of a currency is causing a fixed exchange rate to appreciate (imports increase; exports decrease)

• Devaluation is causing a fixed exchange rate to depreciate (imports decrease; exports increase)

What is a tariff?

A tax on imported foreign goods

What is a quota?

a limit on imported foreign goods

What are impacts of tarriffs?

• Benefits domestic producers and penalizes foreign producers.

• Raises the price and decreases the quantity demanded of a foreign product