AP Macro Unit 7 Exam

Financial account

The financial account measures the purchase and sale of financial assets abroad

Balance of payments

A nation's balance of payments is the sum of all the financial transactions that take place between its residents and residents of foreign nations.

Which of the following will happen to aggregate demand in the United States if the United States dollar appreciates in foreign exchange markets? A. Aggregate demand will decrease because net exports will decrease. B. Aggregate demand will decrease because imports will decrease. C. Aggregate demand will increase because exports will increase. D. Aggregate demand will increase because imports will decrease. E. Aggregate demand will increase because exports will decrease.

A. Aggregate demand will decrease because net exports will decrease.

Which of the following will most likely cause an inflow of financial capital to Canada? A. An increase in the Canadian federal budget deficit B. An increase in the Canadian money supply C. An increase in private savings in Canada D. An increase in taxes on investment in plant and equipment E. An increase in real interest rates of Canada's trading partners

A. An increase in the Canadian federal budget deficit Correct. An increase in the budget deficit increases the demand for loanable funds (or reduces the supply of loanable funds), which increases real interest rates in Canada and attracts financial capital from abroad.

The balance of payments states that the current account plus the financial account _______________________________________________________.

ADD UP TO ZERO

Assume Country X's economy is experiencing high rates of inflation. Which of the following policies will control the problem of inflation, and what is the consequent effect on the value of Country X's currency in foreign exchange markets? A. A contractionary monetary policy will increase interest rates, which will cause the currency to depreciate. B. A contractionary monetary policy will increase interest rates, which will cause the currency to appreciate. C. An expansionary monetary policy will decrease interest rates, which will cause the currency to appreciate. D. An expansionary monetary policy will decrease interest rates, which will cause the currency to depreciate. E. An expansionary monetary policy will increase interest rates, which will cause the currency to depreciate.

B. A contractionary monetary policy will increase interest rates, which will cause the currency to appreciate.

Which of the following transactions is recorded as a credit entry in the country's current account? A. Imports of capital goods B. Exports of consumer goods C. Purchases of foreign government bonds D. Sales of domestic financial assets to foreign investors E. Income transfers from the country's residents to recipients abroad

B. Exports of consumer goods

Which of the following is recorded in a country's balance of payments accounts? A. The monthly payments by the country's residents on domestic loans B. Financial capital flows between the country and the rest of the world C. The value added by each industry in the country at each stage of production D. The aggregate spending of the country's residents on consumer goods E. Changes in the required reserve ratio determined by the country's central bank

B. Financial capital flows between the country and the rest of the world Correct. The balance of payments records the country's international transactions, which include financial capital flows between the country and the rest of the world.

Suppose that the exchange rate between the United States dollar ($) and the Thai currency, baht (฿), is ฿1=$0.05. Leticia wants to buy a ฿600 souvenir from Thailand. What is the souvenir's price in dollars? A. $0.05 B. $1 C. $30 D. $600 E. $12,000

C. $30 Correct. The souvenir's price in dollars == the souvenir's price in baht ×× the exchange rate ($/฿) =฿600×0.05($/฿)=$30($/฿) =฿600×0.05($/฿)=$30.

Assuming the government of a country imposes a tariff on its imports of foreign goods, what is the likely effect on the country's currency in foreign exchange markets? A. The supply of the currency will increase and the currency will depreciate. B. The supply of the currency will increase and the currency will appreciate. C. The supply of the currency will decrease and the currency will appreciate. D. The demand for the currency will decrease and the currency will appreciate. E. The demand for the currency will increase and the currency will depreciate.

C. The supply of the currency will decrease and the currency will appreciate.

Assume that a nation's government uses an expansionary fiscal policy to restore full employment. What effect will the resulting change in the price level have on the supply and demand of the nation's currency in the foreign exchange market? A. The supply and demand will both increase. B. The supply and demand will both decrease. C. The supply will increase and the demand will decrease. D. The supply will decrease and the demand will increase. E. The supply will not change and the demand will decrease.

C. The supply will increase and the demand will decrease.

Italian tourists spend 5 million in the U.S. while American tourists spend 8 million in Italy. Current or Financial account Debit or Credit

Current account (net transfers), debit

One living in California sends a portion of his earnings to his family in El Salvador Current or Financial account Debit or Credit

Current account (net transfers), debit

A US company, Boeing, sells twenty airplanes to China Current or Financial account Debit or Credit

Current account (trade of g/s), credit

A Korean company sells vests to the U.S. Military Current or Financial account Debit or Credit

Current account (trade of g/s), debit

The exchange rate for one Qatari riyal was 0.5 Turkish lira in 2012, and it increased to 1.25 Turkish lira in 2018. Which of the following is true about the value of the Turkish lira in 2018 ? A. 1 Turkish lira = 2 Qatari riyal, and the Turkish lira appreciated. B. 1 Turkish lira = 1.75 Qatari riyal, and the Turkish lira appreciated. C. 1 Turkish lira = 1.25 Qatari riyal, and the Turkish lira depreciated. D. 1 Turkish lira = 0.8 Qatari riyal, and the Turkish lira depreciated. E. 1 Turkish lira = 0.75 Qatari riyal, and the Turkish lira depreciated.

D. 1 Turkish lira = 0.8 Qatari riyal, and the Turkish lira depreciated. The exchange rate of the Qatari riyal increased from 0.5 to 1.25 Turkish lira. It takes more lira to purchase one riyal. Therefore, the Turkish lira =1/1.25=0.8 Qatari riyal, and it has depreciated against the Qatari riyal.

Which of the following changes in the United States will most likely increase aggregate demand in Japan? A. A decrease in the United States real gross domestic product B. A decrease in the United States price level C. A quota imposed by the United States on goods imported from Japan D. An appreciation of the United States dollar relative to the yen E. An increase in the demand for Japanese financial assets by American investors

D. An appreciation of the United States dollar relative to the yen

How will an increase in private savings in the United States most likely affect financial capital flows and the value of the dollar in foreign exchange markets? A. The United States will experience financial capital inflows, and the dollar will appreciate. B. The United States will experience financial capital inflows, and the dollar will depreciate. C. The United States will experience financial capital outflows, and the dollar will appreciate. D. The United States will experience financial capital outflows, and the dollar will depreciate. E. The United States will experience no change in financial capital flows, and the value of the dollar will not change.

D. The United States will experience financial capital outflows, and the dollar will depreciate.

Suppose that Angola's economy is booming resulting in an increase in the income of domestic residents. How will the increase in income most likely affect the foreign exchange value of the Angolan currency, the kwanza, and the Angolan net exports? A. The kwanza will appreciate and net exports will increase. B. The kwanza will appreciate and net exports will decrease. C. The kwanza will depreciate and net exports will increase. D. The kwanza will depreciate and net exports will decrease. E. The kwanza will depreciate and net exports will not change.

D. The kwanza will depreciate and net exports will decrease.

If the current exchange rate for one Swiss franc is 0.84 euro and the equilibrium exchange rate for one Swiss franc is 0.88 euro, which of the following will occur in the flexible exchange market for the Swiss franc? A. There will be a shortage of euros. B. There will be a surplus of Swiss francs. C. The euro will appreciate. D. The Swiss franc will depreciate. E. The Swiss franc will appreciate.

E. The Swiss franc will appreciate.

A Chinese company buys a shopping mall in Milpitas Current or Financial account Debit or Credit

Financial account (financial asset), credit

A German investor buys $50,000 U.S. Treasury Bonds Current or Financial account Debit or Credit

Financial account (financial asset), credit

Bill, an American, invests $20 million in a ski resort in Canada Current or Financial account Debit or Credit

Financial account (financial asset), debit

The U.S. suffers a larger recession. Shifter: Dollar: Yen:

Income (U.S. will buy fewer Japanese goods) Dollar: ↓S$ and $ appreciates Yen: ↓D¥ and ¥ depreciates

The U.S. government significantly decreases personal income tax. Shifter: Dollar: Yen:

Income (U.S. will import more goods from Japan) Dollar: ↑S$ and $ depreciates Yen: ↑D¥ and ¥ appreciates

Japan has a large budget deficit that increases Japanese interest rates. Shifter: Dollar: Yen:

Interest rates (Americans will save money in Japanese banks) Dollar: ↑S$ and $ depreciates Yen: ↑D¥ and ¥ appreciates

The Federal Reserve sells bonds at high interest rates. Shifter: Dollar: Yen:

Interest rates (Japan will buy more U.S. bonds) Dollar: ↑D$ and $ appreciates Yen: ↑S¥ and ¥ depreciates

Net capital outflow

Net capital outflow is the difference between a country's sale of assets to foreigners and its purchase of assets from foreigners.

Inflation in Japan rises significantly faster than in the U.S. Shifter: Dollar: Yen:

Price level (U.S. goods will be relatively cheaper and Japan will import more goods from the U.S.) Dollar: ↑D$ and $ appreciates Yen: ↑S¥ and ¥ depreciates

Current account

Records: Trade in goods & services (net exports) Net investment income Net transfers

Japan places high tariffs on all U.S. imports. Shifter: Dollar: Yen:

Regulations (U.S. goods will cost more so Japanese imports will decrease) Dollar: ↓D$ and $ depreciates Yen: ↓S¥ and ¥ appreciates

American tourists increase visits to Japan. Shifter: Dollar: Yen:

Tastes (Americans need yen when they visit) Dollar: ↑S$ and $ depreciates Yen: ↑D¥ and ¥ appreciates

Financial account deficit: ___________________________

inflow < outflow

Financial account surplus: ___________________________

inflow > outflow