AP Macro MACRO: International Economics 3 — Questions and Answers
Question 1: Under the gold standard, if Country X experiences a balance of payments deficit, what automatic adjustment mechanism would reduce the deficit?
- The government devalues the currency to boost exports
- Gold outflows reduce the money supply, lowering prices and improving competitiveness (Correct answer)
- The central bank raises interest rates to attract foreign investment
- The government imposes import quotas to limit foreign goods
Correct answer: Gold outflows reduce the money supply, lowering prices and improving competitiveness
Under the gold standard, a BOP deficit causes gold outflows, contracting the money supply, lowering domestic prices, making exports cheaper and imports relatively more expensive.
Question 2: Which of the following policies would most directly cause the U.S. dollar to appreciate on foreign exchange markets?
- The Federal Reserve engages in quantitative easing
- The U.S. government increases spending financed by borrowing
- The Federal Reserve raises the federal funds rate (Correct answer)
- Congress passes a large increase in import quotas
Correct answer: The Federal Reserve raises the federal funds rate
Higher U.S. interest rates attract foreign capital seeking better returns, increasing demand for dollars and causing the dollar to appreciate.
Question 3: Country B imposes a specific tariff of $5 per unit on imported shoes. If the world price of shoes is $20, what is the domestic price after the tariff?
- $15
- $20
- $25 (Correct answer)
- $100
Correct answer: $25
A specific tariff adds a fixed amount to the world price, so domestic consumers pay $20 + $5 = $25 per pair of shoes.
Question 4: Which of the following best describes the J-curve effect?
- Trade deficits permanently worsen after currency depreciation
- A currency depreciation initially worsens the trade balance before improving it (Correct answer)
- Currency appreciation first improves and then worsens the trade balance
- Interest rate increases cause trade deficits to follow a J-shaped path
Correct answer: A currency depreciation initially worsens the trade balance before improving it
After depreciation, the trade balance initially worsens because import/export quantities adjust slowly while import prices rise immediately, then improves as volumes respond.
Question 5: In a small open economy with a flexible exchange rate, expansionary fiscal policy leads primarily to which of the following?
- Higher output and lower interest rates
- Currency depreciation and improved trade balance
- Currency appreciation and crowding out of net exports (Correct answer)
- Higher inflation and a current account surplus
Correct answer: Currency appreciation and crowding out of net exports
Higher government spending raises interest rates, attracting foreign capital, appreciating the currency, making exports less competitive and imports cheaper, crowding out net exports.
Question 6: Which of the following is the primary argument economists make AGAINST protectionist trade policies?
- Domestic industries become too competitive internationally
- Protectionism raises tax revenues that harm the government budget
- Trade barriers prevent gains from specialization and raise consumer prices (Correct answer)
- Import restrictions encourage other countries to buy more from the protected nation
Correct answer: Trade barriers prevent gains from specialization and raise consumer prices
Protectionism prevents countries from exploiting comparative advantage, leading to inefficient production and higher prices for domestic consumers.
Question 7: If China pegs its currency (yuan) to the U.S. dollar at a rate below the free-market equilibrium, what is the most likely result?
- Chinese exports become more expensive for Americans
- China accumulates U.S. dollar reserves to maintain the peg (Correct answer)
- The U.S. dollar depreciates against the yuan
- Chinese imports become cheaper for Chinese consumers
Correct answer: China accumulates U.S. dollar reserves to maintain the peg
An undervalued yuan means excess demand for yuan, so China must sell yuan and buy dollars to maintain the artificially low exchange rate, accumulating dollar reserves.
AP Macro MACRO: International Economics 3
Under the gold standard, if Country X experiences a balance of payments deficit, what automatic adjustment mechanism would reduce the deficit?