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AP Macroeconomics > Unit 04: Financial Sector > Flashcards

Unit 04: Financial Sector Flashcards

1
Q

04.01 Comparative Advanage and International Trade

04.01 Comparative Advantage and International Trade

A
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2
Q

04.01 Comparative Advanage and International Trade

What would the effects be if there were no longer imports to the US?

A
  1. decrease standard of living
  2. no longer export goods
  3. Jobs lost and economy suffer
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3
Q

04.01 Comparative Advanage and International Trade

What are the steps to determine the comparative advantage for countries?

A

Step 01: Determine the opportunity cost of producing each product for each nation.

Step 02: Determine lowest opportunity cost in production of each goods.

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4
Q

04.01 Comparative Advanage and International Trade

How does the input and output mothod compare?

A

Output method: resources fixed and output variable

Input method: resources variable and output is fixed

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5
Q

04.01 Comparative Advanage and International Trade

Define gains of trade:

A

Gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other.

In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs or otherwise liberalizing trade.

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6
Q

04.01 Comparative Advanage and International Trade

Define Terms of Trade:

A

Nations must agree on terms of trade

  • much each product costs in terms of product
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7
Q

04.01 Comparative Advanage and International Trade

What are the three methods to determine opportunity cost?

A
  1. Output Method
  2. Input Method
  3. Cross-Multiplication Method
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8
Q

04.01 Comparative Advanage and International Trade

What is the Output Method?

A

Determine amount of output you get from a fixed set of resources or specific amount of time

look for opportunity cost → put number of bottles or jars produced over number in opposite column

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9
Q

04.01 Comparative Advanage and International Trade

What is the Input Method?

A

Look how many resources is taken to complete one activity

Determine opportunity cost of inputs: put the number in each column under the other number,

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10
Q

04.01 Comparative Advanage and International Trade

What is the cross-multiplication method? What are the advantages and disadvantages?

A
  • Advantages: quick and simple
  • Disadvantages: not show opportunity cost of producing one unit

Find comparative advantage: diagnoally multiply numbers as shown below

choose pair yields highest level of output

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11
Q

04.02 Balance of Payments

04.02 Balance of Payments

A
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12
Q

04.02 Balance of Payments

What are “Balance of payments?”

A
  • to track money
  • system similar to balance sheet
  • sum always zero

Two accounts: current and financial (capital)

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13
Q

04.02 Balance of Payments

What is a current account?

A

Record all the goods and services exchanged between 2 nations

  • “trade deficit” > nation spends more on imports than it earns from exports
  • Also includes:
    • interest (bought stocks)
    • foreign aid
    • funds to relief agencies
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14
Q

04.02 Balance of Payments

What is a trade deficit?

A

“trade deficit” > nation spends more on imports than it earns from exports

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15
Q

04.02 Balance of Payments

What is the financial account?

A

Trade involving financial assets

  • stocks
  • bonds
  • real estate
  • other capital
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16
Q

04.02 Balance of Payments

Suppose a tsunami struck Indonesia, and the American Red Cross donated $500,000 to help the victims. The value of this transaction is recorded in the

current account.

financial account.

A

current account.

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17
Q

04.02 Balance of Payments

Suppose your uncle purchased 500 shares of Toyota stock. The value of this transaction is recorded in the

current account.

financial account.

A

financial account.

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18
Q

04.02 Balance of Payments

Suppose Audi Corporation purchases a factory in the United States. The value of this transaction is recorded in the

current account.

financial account.

A

financial account.

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19
Q

04.02 Balance of Payments

If Bill Gates purchases stock in a foreign corporation then

  1. the U.S. financial account will increase.
  2. the U.S. current account will decrease.
  3. the U.S. financial account will decrease.
  4. the U.S. current account will increase.
  5. the U.S. balance of payments will remain the same.
A

3. the U.S. financial account will decrease

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20
Q

04.02 Balance of Payments

A Colombian investor purchases $100,000 in U.S. securities, then

  1. the U.S. financial account will decrease.
  2. the U.S. current account will decrease.
  3. the U.S. financial account will increase.
  4. the U.S. current account will increase.
  5. the U.S. balance of payments will remain the same.
A

3. the U.S. financial account will increase

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21
Q

04.02 Balance of Payments

All of the following statements about the current account are true except

  1. It is a record of all the goods and services exchanged between two nations.
  2. It counts transfer payments between nations.
  3. It counts interest income on stocks and other financial investment.
  4. It does not count real estate.
  5. It involves trade of financial assets.
A

5. It involves trade of financial assets

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22
Q

04.02 Balance of Payments

Which of the following resulted in a U.S. current account surplus?

  1. Danielle, a US citizen, earned $850 in dividends from her British stocks.
  2. Sy-woei, a US citizen, sent $100 to her cousin in Taiwan.
  3. Gabrielle, a US citizen, purchased a new purse while visiting Paris.
  4. Aaron, a US citizen, attended a concert in England.
  5. The U.S. government sent $10 million in medical supplies to Liberia.
A

1. Danielle, a US citizen, earned $850 in dividends from her British stocks

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23
Q

04.02 Balance of Payments

Which of the following resulted in a U.S. financial account surplus?

  1. An Austrian businessman purchased steel from Pittsburgh Steelworks.
  2. A Spanish tourist played golf at Augusta National Golf Course.
  3. An Italian financier purchased 5,000 shares of Ford Motor Company of Detroit.
  4. A Russian automaker purchased plastic from Miller Plastic Works of Gainesville.
  5. A Lithuanian homemaker bought a new blender from Sears.
A

3. An Italian financier purchased 5,000 shares of Ford Motor Company of Detroit

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24
Q

04.02 Balance of Payments

The balance of payments is

  1. a record of all goods and services exchanged between nations.
  2. the system by which a country tracks all transactions between two nations.
  3. a record of trade involving only financial capital.
  4. a record of all final goods and services exchanged between two nations.
  5. the system by which a nation tracks the sale of goods and services between two nations.
A

2. the system by which a country tracks all transactions between two nations

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25
Q

04.02 Balance of Payments

All of the following are included in the current account except

  1. transactions involving trade between nations.
  2. interest payments for overseas stock purchases.
  3. net transfer payments.
  4. foreign aid payments.
  5. stoforeign ck purchases by Americans.
A

5. stoforeign ck purchases by Americans

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26
Q

04.02 Balance of Payments

When the United States imports more than it exports, then the balance of payments would

  1. record a negative entry in the financial account.
  2. record a negative entry in the current account.
  3. record a positive entry in the financial account.
  4. record a positive entry in the current account.
  5. remain the same.
A

2. record a negative entry in the current account

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27
Q

04.02 Balance of Payments

When the United States provides food aid to starving nations, then the balance of payments would

  1. record a negative entry in the financial account.
  2. record a positive entry in the current account.
  3. record a positive entry in the financial account.
  4. record a negative entry in the current account.
  5. remain the same.
A

4. record a negative entry in the current account

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28
Q

04.02 Balance of Payments

When Uncle Sam receives his interest check from investments overseas, then the balance of payments would

  1. record a negative entry in the financial account.
  2. record a negative entry in the current account.
  3. record a positive entry in the financial account.
  4. record a positive entry in the current account.
  5. remain the same.
A

4. record a positive entry in the current account

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29
Q

04.02 Balance of Payments

A deficit in a nation’s financial account means

  1. it must limit the flow of foreign capital investment to make up the difference.
  2. it must have a deficit in its current account as well.
  3. it must increase interest rates to attract foreign investment.
  4. there must be a surplus in its current account.
  5. there must be more imports than exports for the nation.
A

4. there must be a surplus in its current account

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30
Q

04.02 Balance of Payments

If an exchange student living in the United States receives an allowance check for room and board from her parents, then

  1. U.S. financial account will decrease.
  2. U.S. current account will decrease.
  3. U.S. financial account will increase.
  4. U.S. current account will increase.
  5. U.S. balance of payments will remain the same.
A

4. U.S. current account will increase

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31
Q

04.02 Balance of Payments

If a U.S. Corporation purchases land to build a factory in Costa Rica, then

  1. the U.S. financial account will decrease.
  2. the U.S. current account will decrease.
  3. the U.S. financial account will increase.
  4. the U.S. current account will increase.
  5. the U.S. balance of payments will remain the same.
A

1.the U.S. financial account will decrease

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32
Q

04.02 Balance of Payments

A U.S. balance of trade deficit can result from

  1. an increase in exports from the United States.
  2. a decrease in exports to the United States.
  3. a decrease in imports to the United States.
  4. an increase in imports to the United States.
  5. an increase in imports from the United States.
A

4. an increase in imports to the United States

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33
Q

Which of the following resulted in a U.S. financial account surplus?

  1. Chrysonthia stayed at a hotel while visiting in New Jersey.
  2. Angelica purchased a new home in the Bahamas.
  3. Jenny, a tourist from Ireland, purchased tickets to Universal Studios.
  4. Michael, a Dutch businessman, bought a factory site in Alabama.
  5. Spencer sent $200 to his aunt in Wales.
A

4. Michael, a Dutch businessman, bought a factory site in Alabama

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34
Q

04.03 Exchange Rates, Financial Capital, Net Exports

04.03 Exchange Rates, Financial Capital, and Net Exports

A
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35
Q

04.03 Exchange Rates, Financial Capital, Net Exports

What are the two types of currency exchange systems?

A
  1. Floating exchange rates
  2. Fixed exchange rates
36
Q

04.03 Exchange Rates, Financial Capital, Net Exports

What are the parts of a Foreign Exchange Graphs?

A
  • X-axis: Quantity of money
  • Y-axis: FM/”currency”
    • FM: foreign money when you dont know the name of the other currency
  • Standard supply and demand graphs
    • Demand increases: cheaper than foreign goods
    • Demand US goods increase: foreign nations puchase in dollar = increases demand
      • must supply more foreign money
      • supply foreign dollars increase → price decreases → depreciates in value
37
Q

04.03 Exchange Rates, Financial Capital, Net Exports

How is balance of Trade restored between 2 nations?

A
  1. Demand US dollar increases
    • As the price of the U.S. dollar increases or appreciates, Americans find foreign goods less expensive and foreigners find American goods more expensive, so U.S. imports increase and exports decrease.
  2. US Dollar Appreciates & foreign goods demand increase
    • When net exports decrease in the United States, the U.S. balance of payments moves toward a deficit while the foreign balance of payments moves toward a surplus.
  3. Foreign Dollar Appreciates & US goods demand increase
    • The appreciation of the foreign dollar resulting from the new demand for foreign goods then makes foreign goods appear more expensive for Americans to buy. This means the U.S. balance of payments moves toward a surplus.
38
Q

04.03 Exchange Rates, Financial Capital, Net Exports

What are fixed exchange rates? What is its purpose?

A

Nation’s central bank purchases foreign currency in effort to maintain stable exchange rate

  • keep prices stable on international market
  • make domestic goods appear ore desirable to purchase
  • sort of like a price ceiling
39
Q

04.03 Exchange Rates, Financial Capital, Net Exports

What factors affect the foreign exchange of currency?

A
  1. Consumer tastes and preferences
    • like foreign goods better than domestic goods:
      • demand foreign goods increase
      • domestic dollar depreciate
  2. Inflation
    • negatively impact nation’s currency
      • demand goods decrease with higher price levels
  3. Economics growth of higher incomes
    • growing economy → strong currency & high foreign purchasing power
  4. Interest rates
    • higher rates: increase financial inversetments (want highest returns)
    • lower rates: outflow of financial capital
40
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If the supply of the Aruban florin decreases relative to the U.S. dollar, then the

  1. U.S. dollar will appreciate.
  2. U.S. dollar will depreciate.
  3. quantity demanded of Aruban florins would increase.
  4. demand for the U.S. dollar would increase.
  5. Aruban florin will depreciate.
A

2. U.S. dollar will depreciate

41
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If the demand for the Aruban florin increases relative to the U.S. dollar, then the

  1. U.S. dollar will appreciate.
  2. U.S. dollar will depreciate.
  3. quantity supplied of Aruban florins would decrease.
  4. supply of U.S. dollars would decrease.
  5. Aruban florin will depreciate.
A

2. U.S. dollar will depreciate

42
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Which of the following is true of a fixed exchange rate system?

  1. It can lead to wildly fluctuating prices
  2. It was primarily based on silver until the 1970s
  3. The United States uses a fixed exchange rate system
  4. It keeps the price of goods stable on the international market
  5. It allows for the natural market equilibrium to dictate exchange rates
A

4. It keeps the price of goods stable on the international market

43
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Suppose U.S. consumers decide they like foreign goods better than they like domestic goods. As a result of this change, which of the following is true?

I. The demand for the U.S. dollar will increase.
II. The demand for the U.S. dollar will decrease.
III. U.S. exports will increase as a result of the changing value of the U.S. dollar.
IV. U.S. exports will decrease as a result of the changing value of the U.S. dollar.

  1. I only.
  2. I and III only.
  3. I and IV only.
  4. II and IV only.
  5. II and III only.
A

Good question

44
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If American net exports are significantly increasing, the dollar has most likely

  1. Appreciated
  2. Depreciated
  3. Deflated
  4. Increased in supply on the foreign exchange market
  5. Been demanded less
A

2. Depreciated

45
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Which of the following would cause the U.S. dollar (USD) to appreciate as compared to the euro?

  1. Interest rates in the United States decrease.
  2. American consumers prefer to buy European goods.
  3. European consumers boycott American goods.
  4. GDP in the European Union decreases.
  5. GDP in the European Union increases.
A

Good question

46
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Which of the following would cause the U.S. dollar (USD) to depreciate as compared to the euro?

  1. Interest rates in the United States decrease.
  2. Interest rates in the European Union decrease.
  3. Price levels in the European Union increase.
  4. Price levels in the United States decrease.
  5. GDP in the European Union increases.
A

1. Interest rates in the United States decrease

47
Q

04.03 Exchange Rates, Financial Capital, Net Exports

The U.S. dollar is currently trading for 1.10 Australian dollars (AUD) per dollar. If the exchange rate adjusts to 1 Australian dollar per 1 U.S. dollar then

  1. the AUD has depreciated.
  2. the U.S. dollar has appreciated.
  3. the U.S. dollar has depreciated.
  4. both the AUD and the U.S. dollar have appreciated.
  5. both the AUD and the U.S. dollar have depreciated.
A

3. the U.S. dollar has depreciated

48
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If Colombians learn that American banks are dramatically lowering their interest rates, then the

  1. supply of Colombian Peso will increase.
  2. only the quantity supplied of Colombian Peso will decrease.
  3. supply of Colombian Peso will decrease.
  4. quantity supplied of Colombian Peso will increase.
  5. quantity demanded of Colombian Peso will decrease.
A

3. supply of Colombian Peso will decrease

49
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If the Chinese government sets the exchange rate at 4 yuan per 1 U.S. dollar, then the

  1. supply of Chinese yuan will increase.
  2. supply of Chinese yuan will decrease.
  3. quantity supplied of Chinese yuan will decrease.
  4. quantity supplied of Chinese yuan will increase.
  5. quantity demanded of Chinese yuan will decrease.
A

3. quantity supplied of Chinese yuan will decrease

50
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Suppose that the United States and China trade exclusively with each other. What will happen to the value of the U.S. dollar, ceteris paribus, if productivity in China is greater than productivity in the United States?

  1. The U.S. dollar will appreciate.
  2. The U.S. dollar will depreciate.
  3. The U.S. dollar will not change in value.
A

2. The U.S. dollar will depreciate

51
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Suppose that the United States and China trade exclusively with each other. What will happen to the value of the U.S. dollar, ceteris paribus, if American produced tires are better than Chinese produced tires?

  1. The U.S. dollar will appreciate.
  2. The U.S. dollar will depreciate.
  3. The U.S. dollar will not change in value.
A

1.The U.S. dollar will appreciate

52
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Suppose that the United States and China trade exclusively with each other. What will happen to the value of the U.S. dollar, ceteris paribus, if Chinese interest rates rise significantly?

  1. The U.S. dollar will appreciate.
  2. The U.S. dollar will depreciate.
  3. The U.S. dollar will not change in value.
A

2. The U.S. dollar will depreciate

53
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Suppose that the United States and China trade exclusively with each other. What will happen to the value of the U.S. dollar, ceteris paribus, if the United States establishes a quota on all Chinese products?

  1. The U.S. dollar will appreciate.
  2. The U.S. dollar will depreciate.
  3. The U.S. dollar will not change in value.
A

1.The U.S. dollar will appreciate

54
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Suppose that the United States and China trade exclusively with each other. What will happen to the value of the U.S. dollar, ceteris paribus, if the price level in China rises faster than the price level in the United States?

  1. The U.S. dollar will appreciate.
  2. The U.S. dollar will depreciate.
  3. The U.S. dollar will not change in value.
A

1. The U.S. dollar will appreciate

55
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Which of the following is true of any two free-floating currencies on the foreign exchange market when considered in terms of each other?

  1. An increase in the supply of one currency decreases the supply of the other.
  2. An increase in the supply of one currency increases the supply of the other.
  3. A decrease in the demand for one currency has no effect on the other’s price.
  4. The appreciation of one currency necessarily means the depreciation of the other.
  5. An appreciation of one currency means the GDP in its country has gone up.
A

4. The appreciation of one currency necessarily means the depreciation of the other

56
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If the Brazilian real gets weaker, ceteris paribus, American exports to Brazil will

  1. be renegotiated
  2. be unaffected
  3. inflate
  4. go up
  5. go down
A

5. go down

57
Q

04.03 Exchange Rates, Financial Capital, Net Exports

When the international value of the U.S. dollar increases,

Americans pay more for foreign goods.

the U.S. trade deficit decreases.

U.S. imports decrease.

Americans would demand less foreign currency.

checkCorrect

U.S. exports decrease.

A

U.S. exports decrease.

58
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Which of the following is true concerning the international value of the United States dollar?

  1. It is determined by U.S. investors in the foreign exchange market.
  2. It is determined by foreign investors in the foreign exchange market.
  3. It is determined by foreign and U.S. investors in the foreign exchange market.
  4. It is determined by the federal government.
  5. It is determined by the foreign governments in the foreign exchange market.
A

3. It is determined by foreign and U.S. investors in the foreign exchange market.

59
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Assume the U.S. dollar and the Canadian dollar are traded in flexible currency markets. Which of the following would cause the U.S. dollar to depreciate relative to the Canadian dollar?

  1. Higher price level in Canada relative to the United States.
  2. Higher interest rates in the United States relative to Canada.
  3. Lower interest rates in the United States relative to Canada.
  4. Decreasing GDP in the United States than in Canada.
  5. Increasing GDP in Canada relative to the United States.
A

3. Lower interest rates in the United States relative to Canada

60
Q

04.03 Exchange Rates, Financial Capital, Net Exports

The U.S. dollar is currently trading for 7 pesos per dollar. If the exchange rate adjusts to 10 pesos per dollar then

  1. the U.S. dollar has depreciated.
  2. the U.S. dollar has appreciated.
  3. the Mexican peso has appreciated.
  4. both the Mexican peso and the U.S. dollar have appreciated.
  5. both the Mexican peso and the U.S. dollar have depreciated.
A

2. the U.S. dollar has appreciated

61
Q

04.03 Exchange Rates, Financial Capital, Net Exports

When the U.S. dollar appreciates against the Russian ruble, then

  1. American tourists who travel to Russia will benefit from the new exchange rate.
  2. Russian oil is more expensive for American consumers.
  3. the Russian government will purchase more American wheat.
  4. American jewelers will import less gold jewelry from Russia.
  5. Russian workers in American owned factories will receive a lower wage.
A

1. American tourists who travel to Russia will benefit from the new exchange rate

62
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Suppose Europeans began purchasing real assets in the United States. How would this impact the foreign exchange market for the euro and the U.S. dollar price of the euro?

Supply of euro / U.S. dollar Price of euro

  1. Increase / Increase
  2. Increase / Decrease
  3. Decrease / Increase
  4. Decrease / Decrease
  5. Decrease / Not Change
A

2. Increase / Decrease

63
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If the American dollar has appreciated compared to the Indian rupee, what has happened to the price of the rupee in American dollars?

  1. It has gone down.
  2. It has gone up.
  3. It has stayed the same.
  4. It is unknowable.
  5. It has inflated.
A

1. It has gone down

64
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If the U.S. dollar price of the euro decreases, then

the U.S. dollar has depreciated.

checkCorrect

the U.S. dollar has appreciated.

the euro has appreciated.

both the euro and the U.S. dollar have appreciated.

both the euro and the U.S. dollar have depreciated.

A

the U.S. dollar has appreciated.

65
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Suppose that Pier 1™ Imports purchases 20,000 Persian rugs from Morocco. The company would pay for the rugs with

  1. U.S. dollars.
  2. euros.
  3. Moroccan currency.
  4. gold or silver.
  5. General African currency.
A

3. Moroccan currency

66
Q

04.03 Exchange Rates, Financial Capital, Net Exports

Proponents of a fixed exchange rate system point out that a major drawback of a floating exchange rate is that it

  1. is responsible for creating trade deficits.
  2. helps eliminate the uncertainty about the value of a currency.
  3. keeps a nation from trading fairly with other nations.
  4. is based on the value of gold held by a nations.
  5. leads to uncertainty about the value of goods traded internationally.
A

5. leads to uncertainty about the value of goods traded internationally

67
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If a supply shock dramatically increases the prices of domestic goods in China, the American dollar will _____ and the Chinese yuan will ____.

  1. depreciate, depreciate
  2. depreciate, appreciate
  3. appreciate, depreciate
  4. appreciate, appreciate
  5. unknown, depreciate
A

3. appreciate, depreciate

68
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If an exchange rate is said to be floating, that means it is

  1. set by the World Bank.
  2. set by the government.
  3. set by the market forces of supply and demand.
  4. set by the International Monetary Fund.
  5. set by individual banks.
A

3. set by the market forces of supply and demand

69
Q

04.03 Exchange Rates, Financial Capital, Net Exports

If an exchange rate is said to be fixed, that means it is

  1. set by the World Bank.
  2. set by the government.
  3. set by the market forces of supply and demand.
  4. set by the International Monetary Fund.
  5. set by individual banks.
A

2. set by the government

70
Q

4.04 FOREIGN EXCHANGE MARKETS

04.04 Foreign Exchange Markets

A
71
Q

4.04 FOREIGN EXCHANGE MARKETS

How does the monetary of the following currencies compare?

1 US$ = 1.5 Foreign Dollars

1 Foreign Dollar = 0.67 US$

A

The “price” of 1 U.S. dollar is 1.5 foreign dollars and the price of one foreign dollar is 67 cents (0.67 of a dollar). The U.S. dollar is stronger because it buys more than 1 foreign dollars and the foreign dollars is weaker because it buys less than 1 U.S. dollar.

Suppose that the exchange rate changes to 1 US$ = 0.9 Foreign Dollars. That means that the U.S. dollar has depreciated relative to the foreign dollars, because one U.S. dollar can buy fewer foreign dollars than when the exchange rate was 1 US$ = 1.5 Foreign Dollars. If the U.S. dollar has depreciated, then the foreign dollar has appreciated relative to the U.S. dollar because it takes fewer foreign dollars to purchase one U.S. dollar.

72
Q

4.04 FOREIGN EXCHANGE MARKETS

How do interst rates change with a change in interest rates or price levels?

A
  • increase foreign interest rates: US invest
    • higher rate of return on money
    • supply US dollars for foreign dollar
      • foreign dollar appreciate
      • US dollar depreciate
  • Increase price level: goods and services more expensive
    • decrease demand & dollars
      • depreciate
      • foreign country appreciate
73
Q

4.04 FOREIGN EXCHANGE MARKETS

How does economic growth impact foreign exchange rates?

A
  • grows: more income
    • increase demand imports & domestic goods
    • increased demand foreign goods
      • increase supply dollar
      • depreciate US dollar
74
Q

4.04 FOREIGN EXCHANGE MARKETS

What causes a deppreciation and appreciation of currency?

A

Deppreciation of Currency

  1. decrease demand money
  2. increase supply of money

Appreciation of Currency:

  1. Increase demand money
  2. decrease supply of money
75
Q

4.04 FOREIGN EXCHANGE MARKETS

How does aggregate demand or GDP change in response to a change in the value of a dollar?

A
  1. Dollar Depreciates:
    • American goods appear less expensive to foreigners
    • (result) US dollars exports increase and imports decrease
    • Net Exports Positive: AD & GDP grows
  2. Dollar Appreciates:
    • opposite
    • Takes more foreign dollars purchase US goods
    • Exports decrease and imports increase
    • Net Exports Negative: AD and GDP decrease
76
Q

04.05 Free Trade and Trade Barriers

04.05 Free Trade and Trade Barriers

A
77
Q

04.05 Free Trade and Trade Barriers

What is the reason for specialization?

A

cost more to produce multiple goods than to specialize in one and trade for the others

78
Q

04.05 Free Trade and Trade Barriers

What are free trade agreements and what makes them compelling?

A
  • why: more efficient and less opportunity costs
  • what: countries to trade with each other wihtout imposiing restrictive tariffs or uotes on each other
79
Q

04.05 Free Trade and Trade Barriers

What are the first free trade agreement?

A

GATT (General Agreement on Tariffs and Trade)

  • result WW2
  • replaced by WTO (world trade organization) in 1990s
80
Q

04.05 Free Trade and Trade Barriers

What are the 5 arguments in favor for trade restrictions?

A
  1. Infant (new) industries argument
  2. National defense argument
  3. Saving jobs argument
  4. Dumping argument
  5. Environmental protection agrument
81
Q

04.05 Free Trade and Trade Barriers

What are the three main types of trade restrictions?

A
  • Tariff
  • Quota
  • Voluntary Export Restriction (VER)
  • Licensing requirements
82
Q

04.05 Free Trade and Trade Barriers

What are tariffs?

A

tax

  • importing country changes producing country tax to sell product
  • makes prices higher

Why:

  1. protecting workers
  2. generate revenue

Benefit: more domestic producers who are willing and able to supply product at new higher price so increae in domestic production.

83
Q

04.05 Free Trade and Trade Barriers

What is a quota?

A

Importing country only allows a certain number of goods to be imported

  • usually set below what exporting country would like to sell
  • why:
    • protect local production
    • more likely purchase local products
84
Q

04.05 Free Trade and Trade Barriers

What is Voluntary Export Restriction (VER)?

A

VER occurs when a nation is trying to avoid quotas and tariffs

  • agree to voluntarily restrict amount of exports
  • importing nation can protect businesses

Advantages: easy to increase exports in the future

(graph same as quota)

85
Q

What are licensing requirements?

A

Some nations require importers to acquire a government license in order to bring goods into the country.

  • restrict number of licences
  • make licences expensive

Result: successfully decrease number goods and services imported

AP Macroeconomics (6 decks)

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