AP Macro International Finance 2

Question 1

If the U.S. dollar appreciates against the euro, what happens to U.S. exports to Europe?

Accepted Answer

U.S. exports become more expensive for Europeans

Answer

A stronger dollar makes U.S. goods more expensive in foreign currency terms, reducing demand for U.S. exports.

Question 2

Which of the following would cause the U.S. current account deficit to widen?

Accepted Answer

A decrease in U.S. domestic savings relative to investment

Answer

A current account deficit equals the gap between domestic investment and domestic savings; when savings fall relative to investment, the deficit widens.

Question 3

Under a fixed exchange rate system, if a country's currency is overvalued, the central bank must:

Accepted Answer

Sell foreign currency reserves to buy domestic currency

Answer

To defend an overvalued currency, the central bank sells foreign reserves and buys its own currency to maintain the fixed peg.

Question 4

The J-curve effect describes the phenomenon where a currency depreciation initially:

Accepted Answer

Worsens the trade balance before improving it

Answer

The J-curve occurs because import/export quantities adjust slowly, so the trade balance worsens before improving after depreciation.

Question 5

If Brazil runs a capital account surplus, which of the following must be true?

Accepted Answer

Brazil is receiving more capital inflows than outflows

Answer

A capital account surplus means a country receives more capital investment from abroad than it sends out.

AP Practice Test

AP Practice Test

AP Macro International Finance 2