Macro AP Unit 6

Question 1

Explain the difference between the current account and the capital and financial account.

Answer 1

The current account measures the sale and purchase of goods and services between countries. The CFA measures the sale and purchase of financial assets like currency, bonds, and stocks.

Question 2

Explain why two currencies can’t appreciate relative to each other at the same time.

Answer 2

The exchange rates of different currencies are reciprocals of each other. When currency A appreciates relative to currency B, then currency B must depreciate relative to currency A.

Question 3

Explain why appreciation of the currency results in a decrease in net exports for the country.

Answer 3

When a country’s currency appreciates, it becomes more expensive for foreigners. These foreigners purchase fewer goods and services causing net exports to decrease.

Question 4

Explain why inflation results in both a decrease in demand and an increase in supply for a country’s currency.

Answer 4

Inflation causes foreigners to demand less of the country’s goods so the demand for the currency falls. Inflation also causes citizens to want relatively cheap foreign goods which increases the supply of the currency.

Question 5

Explain why an increase in real interest rate will increase financial capital inflow.

Answer 5

When real interest rates increase, foreigners will want more of that country’s currency so they can purchase interest-bearing assets and earn a high rate of return.