Question 1

What are net exports?

Accepted Answer

The difference in value between all exported goods/services and all imported goods/services

(exports > imports = surplus; exports < imports = deficit)

Question 2

What are net investments?

Accepted Answer

Any interest or dividend paid to or from domestic investors

Question 3

What are net transfers?

Accepted Answer

Any aid or grants paid to or from the domestic economy

(e.g., US gives foreign aid to Ukraine)

Question 4

What is the current account (CA)?

Accepted Answer

The value of a country's net exports, net income from abroad, and net unilateral transfers

Question 5

Is the CA always balanced?

Accepted Answer

No, the CA may show a surplus or a deficit

(US has a negative CA, mostly due to many more imports than exports; China has a positive CA)

Question 6

What does a nation's balance of trade measure?

Accepted Answer

The difference between its exports and imports of goods and services

Positive balance of trade (trade surplus): a country exports more than it imports (China)

Negative balance of trade (trade deficit): a country imports more than it exports (US)

Question 7

What are financial investments?

Accepted Answer

Purchasing foreign or domestic financial assets

(foreign purchase of domestic = positive; domestic purchase of foreign = negative)

(e.g., buying a bond of a foreign government's)

Question 8

What are real investments?

Accepted Answer

Purchasing foreign or domestic land and businesses (e.g., real estate, factories)

(see financial investments)

Question 9

What is the capital and financial account (CFA)?

Accepted Answer

A record of financial capital transfers and purchases and sales of real assets between countries

(foreign investment in real estate, government bonds, and various financial assets)

Question 10

Is the CFA always balanced?

Accepted Answer

No, the CFA may show a surplus (financial capital inflow) or a deficit (financial capital outflow)

(US has an inflow; Mexico has an outflow)

Question 11

What is the difference between a current account (CA) and a capital and financial account (CFA)?

Accepted Answer

A CA measures exports and imports of goods and services, while a CFA measures capital flows and investment

(CA also includes transfer payments, while the CFA includes asset purchases and sales)

Question 12

What is the balance of payments (BOP)?

Accepted Answer

An accounting system that records a country's international transactions for a particular time period

Consists of the CA and the CFA

Question 13

What are credits and debits for a BOP account?

Accepted Answer

Credit: any transaction that causes money to flow into a country

Debit: any transaction that causes money to flow out of a country

Question 14

What is the equation for the balance of payments?

Accepted Answer

CA + CFA = 0

The sum of all credit entries should match the sum of all debit entries

Question 15

Why does CA + CFA = 0?

Accepted Answer

When an economy imports goods, a foreign economy receives the domestic economy's currency. That currency has no use other than to be invested back into the domestic economy by the foreign economy

(e.g., US imports clothes from China -> China has USD -> China spends USD on US assets, such as real estate)

Question 16

What is the foreign exchange market?

Accepted Answer

A global market where currencies are bought, sold, and exchanged

(exchanging USD to Euros to Yuan, etc.)

Question 17

What is the exchange rate?

Accepted Answer

The price of one currency in terms of another

(As of 4/26/23, the exchange rate for USD to Euros is 0.90€)

Question 18

What does it mean for a currency to appreciate or depreciate?

Accepted Answer

Appreciate: one currency becomes more valuable in terms of another

Depreciate: one currency becomes less valuable in terms of another

Question 19

What is the foreign exchange market?

Accepted Answer

The market where one currency is exchanged for another

Question 20

What causes the demand for a currency in the foreign exchange market?

Accepted Answer

Demand for a country’s goods, services, and financial assets

Question 21

What causes the supply of a currency in the foreign exchange market?

Accepted Answer

Making payments in other currencies

(if Britain wants to import Japanese goods, it must convert British Pounds to Japanese Yen, which means it must sell Pounds, increasing the supply of Pounds and decreasing the supply of Yen)

Question 22

When is equilibrium achieved in the foreign exchange market?

Accepted Answer

Equilibrium is achieved when the exchange rate is such that the quantities demanded and supplied of the currency are equal

Question 23

What happens when there is a disequilibrium exchange rate?

Accepted Answer

Disequilibrium exchange rates create surpluses and shortages in the foreign exchange market

Market forces drive exchange rates toward equilibrium

Question 24

What is the relationship between exchange rate and quantity demanded for a currency?

Accepted Answer

Inverse: if a currency has a higher exchange rate (is more expensive), quantity demanded for the currency falls

Question 25

What is the relationship between exchange rate and quantity supplied for a currency?

Accepted Answer

Positive: if a currency has a higher exchange rate (is more expensive), quantity supplied for the currency rises

Question 26

What are tariffs?

Accepted Answer

Taxes imposed on the import or export of goods

Question 27

What is the difference between revenue and protective tariffs?

Accepted Answer

Revenue tariffs: taxes on goods not produced domestically

Protective tariffs: taxes on goods produces domestically

Question 28

What are import quotas?

Accepted Answer

Maximum limits on the number of goods that can be imported

(similar effects to tariffs, but the government does not make income)

Question 29

How does expansionary fiscal policy affect exchange rates?

Accepted Answer

It will depreciate the country's currency

(expansionary fiscal policy -> increased PL -> lower net exports -> depreciate currency)

Question 30

How does monetary policy affect exchange rates?

Accepted Answer

Altering a country's interest rates will increase/decrease investment spending, which impacts the demand for its currency

(contractionary -> higher IR -> higher demand for currency)

Question 31

How will tariffs on Chinese goods affect demand for the Chinese Yuan?

Accepted Answer

Demand for the Yuan will decrease because Chinese goods will be more expensive, so China will export less

Question 32

What happens to a country's net exports when the country's currency appreciates?

Accepted Answer

The net exports decrease because domestic goods are more expensive for other countries to import

(and vice versa if the currency depreciates)

Question 33

How will tariffs on Canadian goods affect Canadian aggregate demand?

Accepted Answer

Tariffs on Canadian goods will depreciate the Canadian dollar

Depreciating the Canadian dollar makes Canadian goods cheaper

Cheaper goods lead to more exports, increasing Canadian AD

Question 34

If a country has higher real interest rates, what will happen to the country's currency?

Accepted Answer

The currency will appreciate

(foreign investors can get higher returns if there are higher RIRs)

Question 35

If real interest rates are higher in Japan than the US, what will happen to the FOREX and LFM graphs?

Accepted Answer

Demand will increase for the Yen because foreign investors will demand more Japanese assets

Supply of loans in the Japanese economy will increase because there is more investment in Japanese assets

Question 36

How can central banks influence net capital inflow?

Accepted Answer

Central banks can influence domestic interest rates in the short run (change RR, DR, or open market operations)

Higher IR -> higher net capital inflow

Lower IR -> lower net capital inflow

Unit 6 - Open Economy, AP Macroeconomics Flashcards