International Finance Flashcards
7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 International Finance flashcards as text
When China pegs the yuan to the dollar at an artificially low value, the primary effect is:
Answer: Chinese exports are subsidized, making them cheaper for foreign buyers
An undervalued yuan makes Chinese exports cheaper in dollar terms, boosting Chinese export competitiveness at the expense of trading partners.
If the nominal exchange rate between the dollar and yen is 150 yen per dollar, and U.S. inflation is 4% while Japan's is 2%, the real exchange rate implies:
Answer: U.S. goods are becoming relatively more expensive compared to Japanese goods
Higher U.S. inflation (4% vs 2%) means U.S. goods become relatively more expensive, worsening U.S. competitiveness despite the nominal rate.
Which of the following would most likely cause a country's currency to depreciate in a floating exchange rate system?
Answer: A persistent current account deficit draining foreign reserves
A persistent current account deficit creates excess supply of the domestic currency as imports outpace exports, causing depreciation.
Foreign direct investment (FDI) differs from portfolio investment in that FDI:
Answer: Represents ownership and control of productive assets abroad
FDI involves establishing or acquiring productive operations abroad (factories, subsidiaries), while portfolio investment involves passive ownership of financial assets.
Which international institution serves as the 'lender of last resort' for countries facing balance of payments crises?
Answer: International Monetary Fund
The IMF provides emergency loans to countries with balance of payments difficulties, often with conditions requiring economic reforms.
If a country's exports are price inelastic, a depreciation of its currency will most likely:
Answer: Have little effect on the quantity of exports but increase revenues in domestic currency
With inelastic exports, quantity demanded changes little with price, but the lower foreign price means each unit earns more in domestic currency terms.
Under the gold standard, a country experiencing a balance of payments deficit would automatically:
Answer: Lose gold, reducing money supply and deflating prices to restore balance
Gold outflows under the gold standard contracted the money supply, lowering prices and wages, which eventually made exports more competitive and restored balance.