AP Macro Foreign Exchange

Which of the following is true regarding international trade

• A country that exports more than it imports has a trade deficit

• A country that exports more than 30% of their GDP has a trade surplus

• A deficit in the current account is offset by a surplus in the capital and financial account

• A country that exports more than it imports will have a financial account surplus

• A country with a trade deficit will have a current account surplus

Suppose price level increases more in the United States than it does in Indonesia. What is the short-run impact on U.S. net exports, the value of the U.S. dollar, and the value of the Indonesian rupee?

• Net Exports / U.S. dollar / Indonesian rupee

  Increase / depreciate / depreciate

• Net Exports / U.S. dollar / Indonesian rupee

  Decrease / depreciate / appreciate

• Net Exports / U.S. dollar / Indonesian rupee

  Increase / depreciate / appreciate

• Net Exports / U.S. dollar / Indonesian rupee

  Decrease / appreciate / depreciate

• Net Exports / U.S. dollar / Indonesian rupee

  Increase / appreciate / depreciate

Which of the following is an example of direct foreign investment?

• An increase in the demand for US dollars by foreigners

• A decrease in the supply of US dollars by Americans

• The purchase of American planed by a Mexican company

• The sale of financial service to a foreign investor by a US bank

• A Chinese company buying a microprocessor factory in Korea

Which of the following would definitely move a country toward a current account deficit?

• An increase in exports

• An increase in imports

• An larger capital account deficit

• An increase in capital outflow

• A decrease in foreign aid provided to other countries

Exchange Rate

• The market determines the value of the country’s currency

• The government activity manages the country’s currency

• The increase of value of a country's currency with respect to a foreign currency (becomes stronger)

• The loss of value of a country's currency with respect to a foreign currency (becomes weaker)

• The price of one currency in terms of the other currency

Depreciation

• The market determines the value of the country’s currency

• The government activity manages the country’s currency

• The increase of value of a country's currency with respect to a foreign currency (becomes stronger)

• The loss of value of a country's currency with respect to a foreign currency (becomes weaker)

• The price of one currency in terms of the other currency

Appreciation

• The market determines the value of the country’s currency

• The government activity manages the country’s currency

• The increase of value of a country's currency with respect to a foreign currency (becomes stronger)

• The loss of value of a country's currency with respect to a foreign currency (becomes weaker)

• The price of one currency in terms of the other currency

Floating Exchange Rate

• The market determines the value of the country’s currency

• The government activity manages the country’s currency

• The increase of value of a country's currency with respect to a foreign currency (becomes stronger)

• The loss of value of a country's currency with respect to a foreign currency (becomes weaker)

• The price of one currency in terms of the other currency

Current Account

• The difference between the purchase of foreign assets and domestic assets purchased by foreigners

• Exporting more than is imported

• Measures the purchase and sale of financial assets abroad (things that continue to earn money).

• Exporting less than is imported (a.k.a Trade gap)

• Measures trades of goods and services, investment income, and net transfers

Which of the following best describes the effect of an increase in interest rates in the United States on the foreign exchange market?

• A) The U.S. dollar appreciates as foreign investors seek higher returns.

• B) The U.S. dollar depreciates as foreign investors sell off U.S. assets.

• C) The U.S. dollar remains stable as interest rates have no effect on currency value.

• D) The U.S. dollar depreciates as domestic investors seek foreign investments.