Open economy: international trade and finance practice questions (AP Macroeconomics)

Sample questions

All 6 free AP Macroeconomics questions on this unit, from the free AP Macroeconomics Practice Test and the free AP Macroeconomics Multiple Choice Questions with Answers. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 12 marks · Exchange rates
   American consumers significantly increase their purchases of goods imported from Japan. In the foreign exchange market, this will most likely cause:
   • A.
     the demand for yen to increase and the yen to appreciate against the dollar
   • B.
     the supply of yen to increase and the yen to depreciate against the dollar
   • C.
     the demand for dollars to increase and the dollar to appreciate against the yen
   • D.
     the yen to depreciate, because Japan is now exporting more goods
   • E.
     no change, because trade in goods does not affect currency markets
   Show answerFrom the free AP Macroeconomics Practice Test →
2. Question 26 marks · Foreign exchange & net exports
   Exchange rates. The United Kingdom and the United States trade goods and financial assets freely, and the exchange rate between the pound and the dollar floats. Suppose the Bank of England raises interest rates while interest rates in the United States remain unchanged.
   (a)

   Explain how the change in United Kingdom interest rates affects international capital flows and the demand for the British pound in the foreign exchange market.

   [2]
   (b)

   Will the pound appreciate or depreciate against the dollar? Explain by describing what happens in the foreign exchange market graph for the pound.

   [2]
   (c)

   Explain the effect of this exchange-rate change on the United Kingdom's net exports.

   [2]
   Show answerFrom the free AP Macroeconomics Practice Test →
3. Question 31 mark · Growth & open economy
   In Lorane, real GDP increased from 800 billion dollars to 840 billion dollars over a year in which the population grew from 40.0 million to 40.8 million. Real GDP per capita grew by approximately:
   • A.
     2 percent
   • B.
     3 percent
   • C.
     5 percent
   • D.
     7 percent
   • E.
     10 percent
   Show answerFrom the free AP Macroeconomics Multiple Choice Questions with Answers →
4. Question 41 mark · Growth & open economy
   In one year Kesh exported goods and services worth 300 billion dollars and imported goods and services worth 350 billion dollars. Its residents received net income (interest, dividends and wages) of 20 billion dollars from abroad and made net transfers of 10 billion dollars to foreigners. Assuming no change in official reserves, Kesh's current account and its capital and financial account balances were:
   • A.
     a current account deficit of 50 billion and a capital and financial account surplus of 50 billion
   • B.
     a current account deficit of 40 billion and a capital and financial account deficit of 40 billion
   • C.
     a current account surplus of 40 billion and a capital and financial account deficit of 40 billion
   • D.
     a current account deficit of 30 billion and a capital and financial account surplus of 30 billion
   • E.
     a current account deficit of 40 billion and a capital and financial account surplus of 40 billion
   Show answerFrom the free AP Macroeconomics Multiple Choice Questions with Answers →
5. Question 51 mark · Growth & open economy
   Inflation in Lorane rises to 12 percent per year while inflation among its trading partners stays near 2 percent. With a floating exchange rate, in the foreign exchange market for Lorane's currency, the dinar, this will most likely cause:
   • A.
     the demand for dinars to increase and the dinar to appreciate
   • B.
     the demand for dinars to decrease and the dinar to depreciate
   • C.
     the supply of dinars to decrease and the dinar to appreciate
   • D.
     the supply of dinars to decrease and the dinar to depreciate
   • E.
     no change in the exchange rate, since inflation affects only the domestic price level
   Show answerFrom the free AP Macroeconomics Multiple Choice Questions with Answers →
6. Question 61 mark · Growth & open economy
   The exchange rate between the United States dollar and the euro changes from 1 dollar = 0.80 euro to 1 dollar = 1.00 euro. A machine made in the United States sells for 50,000 dollars. As a result of the exchange-rate change:
   • A.
     the dollar has depreciated, and the machine's price in euros falls from 50,000 to 40,000
   • B.
     the dollar has appreciated, and the machine's price in euros falls from 62,500 to 50,000
   • C.
     the euro has appreciated, so United States exports to Europe will increase
   • D.
     the dollar has appreciated, and the machine's price in euros rises from 40,000 to 50,000
   • E.
     the dollar has depreciated, and the machine's price in euros rises from 40,000 to 50,000
   Show answerFrom the free AP Macroeconomics Multiple Choice Questions with Answers →

Key terms

The definitions and formulas AP Macroeconomics expects for open economy: international trade and finance, typeset as they appear on the paper.

Balance of payments

The record of a country's transactions with the rest of the world. The current account (goods, services, income, transfers) and the capital and financial account (asset purchases) sum to zero, so a current account deficit is matched by net capital inflows.

$$CA + CFA = 0$$

Foreign exchange market

The market where one currency is traded for another. Demand for a currency comes from foreigners buying that country's exports and assets; supply comes from its residents buying imports and foreign assets.

Appreciation and depreciation

A currency appreciates when it buys more of another currency and depreciates when it buys less. Appreciation makes exports dearer and imports cheaper, lowering net exports and aggregate demand.

Interest rates and capital flows

A higher real interest rate at home attracts foreign financial capital, raising demand for the domestic currency and appreciating it. This is the link from monetary policy to the exchange rate the exam tests most often.

Net exports and aggregate demand

Net exports are exports minus imports. They rise with foreign income and with a depreciation of the home currency, shifting aggregate demand right.

$$NX = X - M$$

Trade policy and the exchange rate

A tariff or quota that reduces imports also reduces the supply of the home currency on the foreign exchange market, appreciating it, which partly offsets the policy's effect on the trade balance.

Frequently asked questions

Other AP Macroeconomics topics

• Basic economic concepts
• Economic indicators and the business cycle
• National income and price determination
• Financial sector
• Long-run consequences of stabilization policies

All AP Macroeconomics topics · All free practice exams