AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley
NAME________________________________________________
PART I: Multiple Choice
1. If interest rates rise relatively more in country A than in country B, then the value of
country A’s currency will
A. Appreciate
B. Depreciate
C. Remain unchanged
D. Change indeterminately
E. Depreciate by the difference in interest rate
2. Suppose the real interest rate in a county rises. What can be expected to happen to the
demand for this nation’s currency and, therefore, the value of its currency and net
exports?
Demand
Value
for
of
Net
currency
currency
exports
A.
B.
C.
D.
E.
Decrease
Decrease
Decrease
Increase
Increase
Appreciate
Depreciate
Depreciate
Appreciate
Appreciate
Decrease
Decrease
Increase
Increase
Decrease
3. In 2004 the US had a trade deficit of $603 billion; therefore
A. Net exports were positive
B. Americans consumed more than they produced
C. America’s government spent more than it took in
D. $603 billion worth of capital flowed out of America
E. The government had to make payments to foreign countries of $603 billion
AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley
4. Tariffs and quotas
A. Result in higher domestic prices
B. Promote trade between nations
C. Do not necessarily affect domestic prices
D. Affect domestic prices: tariffs raise them while quotas lower them
E. Are ways to fight inflation
5. An expansionary monetary policy tends to
A. Improve the balance of trade
B. Have no effect on imports
C. Worsen the balance of trade
D. Have no effect on exports
E. Have an ambiguous effect on the balance of trade
6. If the prices rise in the United States relative to other countries then
A. The value of the Dollar will tend to appreciate
B. The value of the Dollar will tend to depreciate
C. Exchange rates will be affected but not the value of the dollar
D. The exchange rate will not be affected
E. The balance of trade will tend toward a surplus
7. If a French firm buys computers from the US, there would be an increase in which of
the following in the foreign exchange market?
A. Demand for US Dollars and supply of Euros
B. Demand for both US Dollars and Euros
C. Supply for US Dollars and demand for Euros
D. Supply of both US Dollars and Euros
E. International value of the Euro relative to the US Dollar
8. Which of the following would be a current account transaction?
A. India buys $10 billion of new US Treasury bonds
B. A US firm buys 5% of the stock of another US firm
C. A US firm builds a new factory in Kenya
D. A US firm sells $500 million of its products to a Chinese company
E. The US buys $8 billion worth of Euros
AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley
9. Assume that the inflation rate in Country X is very high relative to the inflation rates in
all of its trading partners. Which of the following is likely to happen to country X’s
currency on the FOREX market?
A. The demand curve for the currency will SHIFT to the right, and the currency
will appreciate
B. The demand curve for the currency will SHIFT to the left, and the currency
will depreciate
C. The supply curve for the currency will SHIFT to the left, and the currency will
appreciate
D. The supply curve for the currency will SHIFT to the left, and the currency will
depreciate
E. There will be no shift in eth demand curve, but the currency will depreciate
10. A country’s balance of payments accounts records its
A. Tax receipts and expenditures
B. Tariffs and nontariff revenue and government purchases
C. International trading, borrowing, and lending
D. Its tariff receipts and what it pays in tariffs to other nation
E. International exports and imports and nothing else
AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley
Short Answer
1. Explain in your own words the difference between International Trade and
International Asset Transactions. PROVIDE at least one example OF EACH!
2. Explain the statement: “US exports finance imports.”
AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley
3. On the Balance of Payments account, explain the following categories:
a. The Current Account
b. The Capital and Financial Account
4. Why does the balance on the Current Account and the balance on the Capital and
Financial Account always sum to zero?
AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley
5. Explain how demand for a Country X’s goods and services affects Country X’s
currency’s exchange rate.
6. Explain in words how higher interest rates in the US affect the exchange rate of US
dollars.
7. Show graphically how higher interest rates in the US affect the exchange rate of US
dollars. (You do not need to make a graph showing higher interest rates in the US.
You will make just one graph – the supply and demand for US currency)
AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley
8. Provide a general argument FOR Protectionism (a few sentences). Provide at least
three specific examples of protectionist policies.
9. Provide a general argument AGAINST Protectionism (a few sentences). Include the
specific counterarguments for the three examples you noted in #8, above.
10. Provide three examples of Multilateral Trade Agreements and/or Free-Trade Zones.
AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley
FRQ
1. Japan, the European Union, Canada, and Mexico have flexible exchange rates.
(a) Suppose Japan attracts an increased amount of investment from the European
Union.
Using a correctly labeled graph of the loanable funds market in Japan, show
the effect of the increase in foreign investment on the real interest rate in
Japan.
(HINT: EU countries will need to purchase their investment assets in Japenese Yen.
Where will those Yen end up?)
(b) Suppose in a different part of the world, the real interest rate in Canada
increases relative to that in Mexico.
(i) Using a correctly labeled graph of the foreign exchange market for the
Canadian dollar, show the effect of the change in real interest rate in
Canada on the international value of the Canadian dollar (expressed as
Mexican pesos per Canadian dollar).
AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley
2. A United States firm sells $10 million worth of goods to a firm in Argentina, where the
currency is the peso.
(a) Assume that the United States current account balance with Argentina is
initially zero. How will the transaction above affect the United States’ current
account balance? Explain.
(b) Using a correctly labeled graph of the foreign exchange market for the United
States dollar, show how a decrease in the United States financial investment in
Argentina affects the supply of United States dollars.
AP Macroeconomics
CH 37 and 38 Test REVIEW
Mr. Kelley