1. ____/60 4. ____/20
2. ____/20 5. ____/15
3. ____/20 6. ____/15
Name: _______________________
Total: ______/150
AP Macroeconomics Problem Set #4 and #5
Money, Banking and Monetary Policy
International Trade and FOREX
1. ( ____/60) Money, Banking and Financial Markets
Define and give specific examples of each of the following:
a. Definition of financial assets: money, stock and bonds ( ____/10)
b. Time Value of Money (present and future value). ( ____/5)
c. Measures of Money Supply. ( ____/5)
d. How banks create money. ( ____/5)
e. Money Demand. ( ____/5)
f. Money Market – Make sure to include a graph! ( ____/15)
g. Loanable Funds Market – Make sure to include a graph! ( ____/15)
2. ( ____/20) Central Bank and Control of the Money Supply
Define and give specific examples of each of the following:
a. Tools of Central Bank Policy Make sure to provide a complete response here! ( ____/10)
b. Quantity Theory of Money ( ____/5)
c. Real vs. Nominal Interest Rates ( ____/5)
3. ( ____/20 Points) Monetary vs. Fiscal Policy
Complete the attached chart comparing the two
4. (_____/20 Points) Comparative Advantage
The following figures represent the amount that can be produced with a fixed amount of factor inputs.
Bananas
Sugarcane
Jamaica
100
50
Puerto Rico
160
40
a. Which country has the absolute advantage in bananas? Which country has the absolute advantage
in sugarcane? Explain how you arrive at that answer? (____/5)
b. What is Jamaica’s opportunity cost for producing one unit of bananas? What is Puerto Rico’s
opportunity cost for producing one unit of sugarcane? (____/5)
c. Which country has the comparative advantage in bananas? Which country has the comparative
advantage in sugarcane? Explain how you arrive at that answer? (____/5)
d. Should these countries trade? If so, how should they specialize and why? (____/5)
5. (_____/15 Points) International Trade and Foreign Exchange
a. Define trade surplus and trade deficit. Use examples to explain the difference between the current
account and the capital account. (_____/5)
b. Explain the difference between appreciation and depreciation. Use supply and demand of US
dollars to fully explain a situation that would cause the US dollar to depreciate. (_____/10)
6.
(_____/15 Points) International Trade and Foreign Exchange Study Guide
Complete the attached study guide
International Trade
Key Terms
Export-
Balance of Payments
Balance of Payments-
Import-
Current Account-
Net Exports (XN)Example:
Trade Deficit-
Capital Account-
Trade SurplusExample:
Foreign Exchange (FOREX)
Appreciation- The US dollar will appreciate relative to
another currency if demand for the dollar _________
or if supply __________. This will cause US exports to
__________ and imports to __________.
Depreciation- The US dollar will depreciate relative to
another currency if demand for the dollar _________
or if supply __________. This will cause US exports to
__________ and imports to __________.
FOREX Shifters
1.
2.
3.
4.
Foreign Exchange Market
Appreciation and Depreciation
Draw the foreign exchange market for Mexican Pesos. 1. If American tourists increase visits to Japan, the
Show what happens to the value of pesos relative to
supply of US dollars will __________ and the
the US dollar if interest rates in Mexico are higher
demand for Japanese yen will __________. The
dollar will ________ and the yen will ________.
2. If the US government significantly decreases
personal income taxes, the dollar will ________
and the yen will ________
3. If inflation in the Japan rises significantly faster
than in the US, the dollar will ________ and the
yen will __________
4. If Japan has a large budget deficit that increases
Japanese interest rates, the dollar will _________
and the yen will __________
5. If Japan places high tariffs on all US imports, the
dollar will ________ and the yen will ________
6. The US suffers a larger recession the dollar will
__________ and the yen will __________
Fiscal Policy
Monetary Policy
What is it?
Who does it?
Political Concerns
Specific Tools
Expansionary Policies
Process=
Process=
Process=
Process=
Close Recessionary Gap
Concretionary Policies
Close Inflationary Gap
Fiscal vs. Monetary Policy