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AP Macro Unit 6
| Question | Answer |
|---|---|
| What is an export? | Goods and services sold to other countries |
| What is an import? | Goods and services bought from other countries |
| What is net exports (NX)? | Exports minus imports |
| What is a trade deficit? | When imports are greater than exports (NX is negative) |
| What is a trade surplus? | When exports are greater than imports (NX is positive) |
| What is the balance of payments (BOP)? | A record of all international transactions |
| What does the BOP include? | Transactions involving goods, services, and financial assets |
| What are the two parts of the BOP? | Current account and capital/financial account |
| What is the trade balance? | Exports minus imports of goods and services |
| What is investment income? | Earnings from foreign investments |
| Give an example of investment income | Profit from a factory or investment in another country |
| What are net transfers? | One-way payments with nothing received in return |
| Give examples of net transfers | Foreign aid, remittances, gifts, and grants |
| What is the capital and financial account (CFA)? | Tracks the buying and selling of assets |
| What counts as financial assets? | Stocks, bonds, real estate, and factories |
| What is a financial inflow? | When foreigners buy domestic assets |
| What is a financial outflow? | When domestic residents buy foreign assets |
| Give an example of a financial inflow | A foreign company builds a factory in your country |
| Give an example of a financial outflow | A domestic investor buys foreign stocks |
| What is foreign direct investment (FDI)? | Buying or creating real assets in another country |
| What is foreign direct investment (FDI)? | Buying or creating real assets in another country |
| What is foreign portfolio investment? | Buying financial assets like stocks and bonds in another country |
| What is net capital outflow? | Outflow minus inflow |
| What is a financial account surplus? | When inflow is greater than outflow |
| What is a financial account deficit? | When outflow is greater than inflow |
| What is the key balance equation? | CA+CFA=0 |
| What happens if the current account is in deficit? | The capital/financial account must be in surplus |
| What happens if the current account is in surplus? | The capital/financial account must be in deficit |
| Why must the current and financial accounts balance? | Money spent on imports must return as exports or investment |
| What is the key idea behind all international transactions? | Every transaction has two sides: a goods/services side and a financial side |
| Exchange Rate | Price of one currency relative to another currency |
| Protectionism | Use of tariffs, quotas,or subsidies to give your countries businesses a competitive advantage over international businesses. |
| Tariff | A tax on imports |
| Quota | A limit in the quantity of imports |
| Fixed Exchange Rate | The government manages your country's currency Ex.-> China |
| Floating Exchange Rate | The market determines the value of your country's currency Ex. --> Basically everywhere but China |
| What can some countries do to ensure their exchange rate stays stable? | Depreciate their own country's currency |
| Depreciation | The loss/decrease in value of one country's currency in comparison to another. |
| Appreciation | The gain/increase in value of one country's currency in comparison to another. |
| What does depreciation do to a currency? | More units of the said currency is needed to buy another's (or multiple "another's") |
| What does appreciation do to a currency? | Less units of the said currency is needed to buy another's (or multiple "another's") |
| In the foreign exchange (FOREX) market, how many currencies are considered at a time? | Two currencies at a time. |
| What happens to imports and exports when a currency depreciates? | Exports increase and imports decrease. |
| What happens to imports and exports when a currency appreciates? | Imports increase and exports decrease. |
| What happens when Americans demand more Mexican goods? | Demand for pesos increases and the U.S. dollar depreciates. |
| What happens to the Mexican peso when demand for Mexican goods rises? | The peso appreciates. |
| Does increased demand for imports reduce the U.S. trade deficit? | No, it increases the trade deficit. |
| What can cause the U.S. dollar to appreciate? | Higher foreign incomes relative to U.S. incomes. |
| How does higher U.S. inflation affect the dollar? | It causes the dollar to depreciate. |
| What happens if speculators expect the dollar to depreciate? | Demand falls and the dollar depreciates. |
| What happens if U.S. interest rates are lower than other countries? | The dollar depreciates. |
| When the U.S. dollar appreciates, what happens to imports? | Imports increase. |
| When the U.S. dollar appreciates, what happens to exports? | Exports decrease. |
| When the U.S. dollar appreciates, what happens to foreign investment in U.S. bonds? | Foreign investment increases. |
| If Germans invest more in U.S. bonds, what happens to the dollar? | Demand for dollars increases and the dollar appreciates. |
| If Germans invest in U.S. bonds, what happens to the euro? | The euro depreciates. |
| How does an increase in the federal budget deficit affect interest rates? | Interest rates increase. |
| How does a higher budget deficit affect the dollar? | The dollar appreciates. |
| How does a higher budget deficit affect foreign demand for dollars? | Foreign demand increases. |
| If the Federal Reserve increases the money supply, what happens to interest rates? | Interest rates decrease. |
| If the Fed increases the money supply, what happens to the dollar? | The dollar depreciates. |
| If the Fed increases the money supply, what happens to imports? | Imports increase. |
| What open-market operation helps fight a recession? | The Fed buys bonds. |
| What happens to capital inflows when interest rates fall? | Capital inflows decrease. |
| What happens to capital outflows when interest rates fall? | Capital outflows increase. |
| What happens to the dollar when interest rates fall? | The dollar depreciates. |
| If the dollar depreciates, what happens to U.S. imports? | Imports decrease. |
| If the dollar depreciates, what happens to U.S. exports? | Exports increase. |
| If the dollar depreciates, what happens to the trade balance? | It moves toward surplus. |
| What does a balance of trade deficit mean? | Imports exceed exports. |
| If U.S. interest rates rise relative to other countries, what happens? | The dollar appreciates. |
| If the dollar appreciates, what happens to net exports? | Net exports decrease. |
| If the dollar appreciates, what happens to aggregate demand? | Aggregate demand decreases. |
| If demand for Japanese yen increases, what happens to the dollar? | The dollar depreciates. |
| If demand for yen increases, what happens to Japanese goods for Americans? | They become more expensive. |
| What is the effect of a tariff on domestic price and quantity? | Price increases and quantity decreases. |
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