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AP Macroeconomics › Unit 6

AP Macroeconomics Unit 6: Open Economy: International Trade and Finance

10 to 13% of the exam · 180 practice questions · 12 free-response questions

Trade and currencies tie economies together. You will record transactions in the current account and the capital and financial account, then use the foreign exchange market to show appreciation and depreciation. Typical questions chain the effects: a change in real interest rates moves capital flows, which shifts currency demand, which changes net exports. Remember that buying one currency means supplying another, so more demand for euros is also more supply of dollars. Students also forget that a current account deficit is matched by a capital and financial account surplus.

Practice this unit

White belt covers core terms and foundational ideas, Regular is set at exam level, and Black belt has harder multi-step questions.

Topics in this unit

• 6.1 Balance of Payments Accounts (48 questions)
• 6.2 Exchange Rates (19 questions)
• 6.3 The Foreign Exchange Market (25 questions)
• 6.4 Effects of Changes in Policies and Economic Conditions on the Foreign Exchange Market (35 questions)
• 6.5 Changes in the Foreign Exchange Market and Net Exports (25 questions)
• 6.6 Real Interest Rates and International Capital Flows (28 questions)

Free-response questions

• The Market for Pesos (Short question, 5 points)
• Zorland's International Transactions (Short question, 5 points)
• Raising Interest Rates in an Open Economy (Long question, 10 points)
• Three Events and the Value of the Peso (Short question, 5 points)
• Euros, Dollars, and Prices (Short question, 5 points)
• A Weaker Currency in a Recession (Long question, 10 points)
• A Larger Deficit in an Open Economy (Long question, 10 points)
• A Central Bank Defends the Peso (Short question, 5 points)
• A Recession Abroad (Long question, 10 points)
• Capital Flows and Loanable Funds (Short question, 5 points)
• Comparing Real Interest Rates Across Borders (Short question, 5 points)
• Changes in Zorland's Balance of Payments (Short question, 5 points)

Sample questions

These are taken from the Regular set, with the answer and explanation shown.

Topic 6.1 Balance of Payments Accounts

1. A U.S. citizen receives dividends from shares she owns in a French company. In the U.S. balance of payments, this is recorded as

1. Aa credit in the current account
2. Ban outflow in the financial account
3. Can inflow in the financial account
4. Da debit in the current account
5. Ean import in the current account

Answer: A. Income earned on investments abroad is recorded in the current account. Because it is money coming into the United States, it is a credit.

Common trap: Choosing the financial account. Buying the shares was a financial transaction; the dividends they pay are income.

Topic 6.3 The Foreign Exchange Market

2. In the foreign exchange market for Mexican pesos, the supply of pesos comes from

1. AAmericans who want to buy goods produced in Mexico
2. BMexicans who want to buy foreign goods or assets
3. CU.S. tourists who want to vacation in Mexico
4. Dforeigners who want to invest in Mexican companies
5. EMexican firms that sell goods abroad

Answer: B. People supply pesos when they exchange them for other currencies. Mexicans do this when they want to buy foreign goods, services, or assets. Americans buying Mexican goods and foreigners investing in Mexico demand pesos.

Common trap: Choosing Americans buying Mexican goods. They need pesos, so they demand pesos. The suppliers are the people who already hold pesos.

Topic 6.5 Changes in the Foreign Exchange Market and Net Exports

3. Which of the following would decrease U.S. net exports?

• The U.S. dollar appreciates
• Incomes in major U.S. trading partners fall
• Incomes in the United States rise

1. AI only
2. BII only
3. CI and II only
4. DII and III only
5. EI, II, and III

Answer: E. A stronger dollar (I) makes U.S. goods more expensive abroad. Lower foreign incomes (II) reduce foreign purchases of U.S. exports. Higher U.S. incomes (III) increase U.S. imports. All three reduce net exports.

Common trap: Leaving out higher U.S. incomes. They raise imports, which lowers net exports.

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