AP Macro MACRO: International Economics 2 — Questions and Answers
Question 1: If the U.S. dollar appreciates relative to the euro, what happens to U.S. exports to Europe?
- U.S. exports become cheaper for Europeans, increasing exports
- U.S. exports become more expensive for Europeans, decreasing exports (Correct answer)
- U.S. exports are unaffected because trade is denominated in dollars
- U.S. exports increase because American firms earn more per unit sold
Correct answer: U.S. exports become more expensive for Europeans, decreasing exports
A stronger dollar makes U.S. goods more expensive in foreign currency terms, reducing demand for U.S. exports abroad.
Question 2: Country A has a current account surplus. Which of the following must be true?
- Country A is running a budget surplus
- Country A has a capital and financial account deficit (Correct answer)
- Country A's currency is depreciating
- Country A is a net importer of goods and services
Correct answer: Country A has a capital and financial account deficit
The balance of payments must sum to zero, so a current account surplus is offset by a capital and financial account deficit of equal size.
Question 3: Which scenario best illustrates the concept of comparative advantage?
- A country produces all goods at lower absolute cost than its trading partner
- A country exports only goods in which it has an absolute advantage
- A country produces a good at a lower opportunity cost than its trading partner (Correct answer)
- A country imports goods that require more capital than labor to produce
Correct answer: A country produces a good at a lower opportunity cost than its trading partner
Comparative advantage is determined by opportunity cost, not absolute productivity — a country specializes where its opportunity cost is lowest.
Question 4: A quota on imported steel would most likely result in which of the following in the domestic steel market?
- Lower domestic steel prices and higher domestic steel output
- Higher domestic steel prices and higher domestic steel output (Correct answer)
- Higher domestic steel prices and lower domestic steel output
- Lower domestic steel prices and lower domestic steel output
Correct answer: Higher domestic steel prices and higher domestic steel output
Restricting imports reduces supply available domestically, raising the price while incentivizing domestic producers to increase output.
Question 5: If a nation runs a persistent trade deficit, which of the following is the most likely long-run consequence for its currency under a flexible exchange rate system?
- The currency will appreciate due to high demand for imports
- The currency will depreciate as supply of domestic currency on forex markets increases (Correct answer)
- The currency will remain stable because trade deficits are self-correcting immediately
- The currency will appreciate because foreigners accumulate domestic assets
Correct answer: The currency will depreciate as supply of domestic currency on forex markets increases
Persistent trade deficits mean more domestic currency is supplied to pay for imports, increasing supply on forex markets and depreciating the currency over time.
Question 6: Which of the following is recorded as a credit (positive entry) in the U.S. current account?
- A U.S. firm purchases a factory in Germany
- A Japanese tourist spends money at U.S. hotels (Correct answer)
- A U.S. citizen buys a German-made car
- The U.S. government sends foreign aid to Haiti
Correct answer: A Japanese tourist spends money at U.S. hotels
Foreign tourists spending in the U.S. is an export of services, recorded as a credit in the U.S. current account.
Question 7: A tariff on imported goods is most similar to which domestic policy tool in terms of its economic effect on consumers?
- A production subsidy to domestic firms
- An excise tax on a domestically produced good (Correct answer)
- A price ceiling set below the equilibrium price
- An expansionary fiscal policy measure
Correct answer: An excise tax on a domestically produced good
Like an excise tax, a tariff raises the price consumers pay for a good, reducing consumer surplus and distorting market outcomes.
AP Macro MACRO: International Economics 2
If the U.S. dollar appreciates relative to the euro, what happens to U.S. exports to Europe?