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
The 'impossible trinity' (trilemma) in international economics states that a country cannot simultaneously achieve:
Answer: Fixed exchange rates, free capital flows, and independent monetary policy
The impossible trinity holds that a country can achieve at most two of three goals: fixed exchange rates, free capital movement, and autonomous monetary policy.
If the U.S. imposes a tariff on imported steel, the most likely effect on the U.S. dollar exchange rate is:
Answer: The dollar depreciates because imports fall, reducing demand for foreign currency
Lower imports reduce the supply of dollars in foreign exchange markets (fewer dollars exchanged for foreign currency), which can cause the dollar to appreciate, not depreciate—answer A describes reduced demand for foreign currency, which actually strengthens the dollar.
Currency carry trades involve:
Answer: Borrowing in low-interest-rate currencies and investing in high-interest-rate currencies
Carry trades exploit interest rate differentials by borrowing cheaply in one currency and investing in another with higher rates.
A revaluation of a currency under a fixed exchange rate system refers to:
Answer: An increase in the official value of the currency set by the government
Revaluation is the deliberate upward adjustment of a currency's official value by the government under a fixed rate system, as opposed to devaluation.
Which of the following best describes the effect of expansionary fiscal policy on the exchange rate in an open economy with high capital mobility?
Answer: The exchange rate appreciates because higher interest rates attract foreign capital
Expansionary fiscal policy raises interest rates (crowding out), which attracts foreign capital inflows and causes the domestic currency to appreciate.
The terms of trade refers to:
Answer: The ratio of a country's export prices to its import prices
The terms of trade measure the relative price of exports in terms of imports; an improvement means a country can buy more imports per unit of exports.
If U.S. real interest rates are lower than those in the eurozone, what is the likely capital flow and exchange rate effect?
Answer: Capital flows out of the U.S. into the eurozone, causing the dollar to depreciate
Lower U.S. real interest rates make dollar assets less attractive, causing capital to flow to the eurozone and the dollar to depreciate.