AP Maco Unit

Suppose incomes fall in the United States, but not in Japan. Which of the following will occur?

• The US dollar will appreciate and the Japanese Yen will depreciate

• The US dollar will appreciate and the Japanese Yen will appreciate

• US imports from Japan will increase

• The US dollar will depreciate and the Japanese Yen will appreciate

• Japanese exports to the US will increase

The graph shows the foreign exchange market for British pounds (GBP) . If the exchange rate is $1.70, which of the following is true?

• The surplus of British pounds will cause the exchange rate to depreciate.

• The shortage of British pounds will cause the exchange rate to depreciate.

• The surplus of British pounds will cause the exchange rate to appreciate.

• The shortage of British pounds will cause the exchange rate to appreciate.

Answer explanation

The exchange rate of $1.70 per pound is a disequilibrium exchange rate as it is above the equilibrium exchange rate. It creates a surplus of British pounds in the foreign exchange market and puts downward pressure on the exchange rate, driving the exchange rate toward equilibrium at $1.50 per pound. Therefore, the pound will depreciate.

Which of the following is true for all economies regardless of their economic system?

• Every economy must determine what to produce and how it produces goods and services

• Every economy must find a way to distribute income equally

• Every economy must find ways to privatize markets to maximize efficiency

• Every economy must prevent unemployment through government intervention

• Every economy must open free trade with other economies

If there is a large increase in the number of Europeans traveling to the United States while US citizens’ travel to Europe remains unchanged, which of the following is true

• The euro will depreciate because the demand for euros will decrease

• The euro will depreciate because the supply of euros will increase

• The euro will appreciate because the demand for euros will increase

• The dollar will appreciate because the demand of dollars will decrease

• The dollar will appreciate because the supply of dollars will increase

Which of the following changes in the United States will most likely increase aggregate demand in Japan?

• An increase in the demand for Japanese financial assets by American investors

• A decrease in the United States price level

• A quota imposed by the United States on goods imported from Japan

• An appreciation of the United States dollar relative to the yen

Answer explanation

An appreciation of the dollar is a depreciation of the yen, which makes Japanese goods (Japanese exports) relatively less expensive than American goods; this increases net exports in Japan and so increases aggregate demand in Japan.

The table shows Country X’s balance of payments data for 2018. Which of the following is true about Country X’s current account balance and financial capital flows?

• Country X has a current account deficit of −$65

  million and has net financial capital inflows.

• Country X has a current account surplus of $65 million and has net financial capital outflows.

• Country X has a current account deficit of −$60

  million and has net financial capital inflows.

• Country X has a current account surplus of $60 million and has net financial capital outflows.

Answer explanation

The current account balance is the sum of net exports (exports − imports), net income from abroad, and net unilateral transfers, which is equal to $235 million−$300 million + $20 million + (−$15 million)=−$60 million. Therefore, the current account is in deficit of $60 million. Financial capital flows move in the opposite direction to the goods and services trade claims that give rise to them. Thus, a country with a current account deficit necessarily has a financial capital account surplus (i.e., net financial capital inflows).

Which of the following policies will most likely promote long-run economic growth?

• Decreasing government spending on infrastructure

• Increasing funding for research and development

• Decreasing funding for primary education

Keynesian Theory

• “Sticky Wages” prevents wages from falling. The government should deficit spend to close the gap.

• Price levels effect purchasing power which effects spending

• When U.S. price levels rise, then GDP decreases due to an increase in imports and a decrease in exports.

• Price levels and economy will fix itself. No Government involvement required

• When price levels increase, lenders need to charge higher interest rates which decreases consumer and business investment spending.

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 contractionary monetary policy will increase interest rates, which will cause the currency to depreciate.

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

• An expansionary monetary policy will decrease interest rates, which will cause the currency to appreciate.

• An expansionary monetary policy will decrease interest rates, which will cause the currency to depreciate.

Answer explanation

A contractionary monetary policy will decrease aggregate demand, real output, and the price level, which will decrease inflation. A contractionary monetary policy will decrease the money supply and increase interest rates, attracting foreign financial capital (financial capital inflows), increasing the demand for the country’s currency, and causing the currency to appreciate.

The US can produce 200 airplanes or 400 trucks. Japan can produce 300 trucks or 100 airplanes. 
Which country has the comparative advantage in producing trucks and what is their opportunity cost? 

• Japan, 1/3 airplane per truck

• US, 1/2 airplane per truck

• US, 2 airplanes per truck

• Japan, 3 airplanes per truck