AP Macro International Finance 3

Question 1

If the interest rate in the United States rises relative to other countries, what is the most likely short-run effect on the U.S. dollar?

Accepted Answer

The dollar appreciates as foreign investors seek higher returns

Answer

Higher U.S. interest rates attract foreign capital seeking better returns, increasing demand for dollars and causing appreciation.

Question 2

A country that imports more than it exports is said to have a:

Accepted Answer

Trade deficit and a current account deficit

Answer

When imports exceed exports, a country has a trade deficit, which typically contributes to a current account deficit.

Question 3

Which of the following transactions would be recorded as a credit in the U.S. balance of payments?

Accepted Answer

A Japanese investor buys U.S. Treasury bonds

Answer

A foreign investor purchasing U.S. assets represents a capital inflow, recorded as a credit in the U.S. balance of payments.

Question 4

Under a managed float exchange rate system, exchange rates are determined by:

Accepted Answer

Market forces but with occasional central bank intervention

Answer

A managed float (dirty float) allows market forces to set exchange rates, but the central bank intervenes occasionally to reduce volatility.

Question 5

If the Marshall-Lerner condition is satisfied, a currency depreciation will:

Accepted Answer

Improve the trade balance in the long run

Answer

The Marshall-Lerner condition states that if the sum of export and import demand elasticities exceeds one, depreciation improves the trade balance.

AP Practice Test