AP Macro MACRO: International Economics 3

Question 1

Under the gold standard, if Country X experiences a balance of payments deficit, what automatic adjustment mechanism would reduce the deficit?

Accepted Answer

Gold outflows reduce the money supply, lowering prices and improving competitiveness

Answer

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?

Accepted Answer

The Federal Reserve raises the federal funds rate

Answer

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?

Accepted Answer

$25

Answer

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?

Accepted Answer

A currency depreciation initially worsens the trade balance before improving it

Answer

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?

Accepted Answer

Currency appreciation and crowding out of net exports

Answer

Higher government spending raises interest rates, attracting foreign capital, appreciating the currency, making exports less competitive and imports cheaper, crowding out net exports.

AP Practice Test

AP Practice Test

AP Macro MACRO: International Economics 3