AP Macroeconomics chapter practice15 questions

20 Open-Economy Macroeconomics and Exchange Rates

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

A domestic consulting firm bills a foreign client and is paid. That sale is recorded as

Selling a service to a nonresident is an export, and exports of services sit in the current account. A files a business receipt as a government one. B names the settlement that may follow rather than the service itself, and would be the entry only if the firm had bought a foreign asset. C treats the payment as a purely monetary event, though a cross-border sale is exactly what these accounts exist to record, and E confuses an intangible service with a produced asset.
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D. an export of services in the current account

Selling a service to a nonresident is an export, and exports of services sit in the current account. A files a business receipt as a government one. B names the settlement that may follow rather than the service itself, and would be the entry only if the firm had bought a foreign asset. C treats the payment as a purely monetary event, though a cross-border sale is exactly what these accounts exist to record, and E confuses an intangible service with a produced asset.

Question 2

Question 2 of 15

Net exports are -30, net primary income is 12, and net transfers are -3. The current-account balance is

Add the three components: -30+12-3=-21. A makes every entry an outflow, so the one inflow picks up a minus sign. C stops after net exports and primary income, leaving transfers out. D flips the sign on transfers, and E flips it on net exports, the largest term in the sum.
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B. -21

Add the three components: -30+12-3=-21. A makes every entry an outflow, so the one inflow picks up a minus sign. C stops after net exports and primary income, leaving transfers out. D flips the sign on transfers, and E flips it on net exports, the largest term in the sum.

Question 3

Question 3 of 15

The domestic currency appreciates against the currencies of its trading partners. Other things equal,

Appreciation raises the foreign-currency price of domestic goods and lowers the domestic-currency price of imports, so exports fall and imports rise. B reverses both flows, and E states the price change from the foreign buyer's side backwards. C reads the import price correctly but then attaches a rise in net exports to it, and D carries that mistake into aggregate demand, which this channel shifts left rather than right.
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A. exports fall and imports rise

Appreciation raises the foreign-currency price of domestic goods and lowers the domestic-currency price of imports, so exports fall and imports rise. B reverses both flows, and E states the price change from the foreign buyer's side backwards. C reads the import price correctly but then attaches a rise in net exports to it, and D carries that mistake into aggregate demand, which this channel shifts left rather than right.

Question 4

Question 4 of 15

A depreciation of the domestic currency against its trading partners' currencies leaves domestically produced exports

Foreign buyers need less of their own currency to cover a given domestic-currency price, so exports look cheaper abroad. A runs the conversion the wrong way. B and E both deny any pass-through: B assumes a sticky domestic price blocks it, when a sticky domestic price is precisely what lets the foreign price fall, and E confines exchange-rate effects to asset markets. D reverses which side of the transaction sees the cheaper price.
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C. cheaper when measured in foreign currency

Foreign buyers need less of their own currency to cover a given domestic-currency price, so exports look cheaper abroad. A runs the conversion the wrong way. B and E both deny any pass-through: B assumes a sticky domestic price blocks it, when a sticky domestic price is precisely what lets the foreign price fall, and E confines exchange-rate effects to asset markets. D reverses which side of the transaction sees the cheaper price.

Question 5

Question 5 of 15

When domestic residents buy imported goods, the foreign-exchange market ordinarily records

Paying a foreign seller means converting domestic currency into the seller's, which puts domestic currency on the supply side of the market. B keeps the demand side and drops the supply side, though every exchange has both. C treats a national-accounts classification as if it replaced the currency trade that funds the purchase. D reserves the transfers label for payments made with nothing received in return, and E moves a payment for goods into the financial account, where claims rather than goods change hands.
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A. a supply of domestic currency to obtain foreign currency

Paying a foreign seller means converting domestic currency into the seller's, which puts domestic currency on the supply side of the market. B keeps the demand side and drops the supply side, though every exchange has both. C treats a national-accounts classification as if it replaced the currency trade that funds the purchase. D reserves the transfers label for payments made with nothing received in return, and E moves a payment for goods into the financial account, where claims rather than goods change hands.

Question 6

Question 6 of 15

A country runs a current-account deficit for the year. Which of the following ordinarily accompanies it?

Buying more from abroad than it sells, the country must be financed by the rest of the world, so foreign residents end up holding more claims on it than its residents hold abroad. B points the lending the wrong way, since a deficit country borrows. A reads the trade gap as a subtraction from output rather than the removal of imports already embedded in spending. C locks the budget to the external balance, when private saving and investment can move instead, and D turns a possible market response into a certainty, though a pegged rate is defended rather than allowed to fall.
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E. A net financial inflow as foreigners acquire domestic claims

Buying more from abroad than it sells, the country must be financed by the rest of the world, so foreign residents end up holding more claims on it than its residents hold abroad. B points the lending the wrong way, since a deficit country borrows. A reads the trade gap as a subtraction from output rather than the removal of imports already embedded in spending. C locks the budget to the external balance, when private saving and investment can move instead, and D turns a possible market response into a certainty, though a pegged rate is defended rather than allowed to fall.

Question 7

Question 7 of 15

In the current account, which of the following belongs to net primary income?

Primary income is what factors of production earn across borders: compensation of employees and returns on capital. A belongs to net transfers, since nothing is given in return, and B is the trade balance. D and E are asset transactions recorded in the financial account; the income those assets later throw off is what primary income captures.
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C. Wages and investment income received minus payments abroad

Primary income is what factors of production earn across borders: compensation of employees and returns on capital. A belongs to net transfers, since nothing is given in return, and B is the trade balance. D and E are asset transactions recorded in the financial account; the income those assets later throw off is what primary income captures.

Question 8

Question 8 of 15

A domestic resident purchases shares issued by a foreign corporation. That acquisition is recorded primarily as

Funds leave the country and a claim on a foreign corporation comes back, which is what a financial outflow is. A turns an asset purchase into a service export. C ignores that something was received in exchange, which is the test a transfer fails. D files an asset as a consumption good, and E hands a private purchase to the official sector, where only reserve transactions belong.
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B. a financial outflow acquiring a foreign claim

Funds leave the country and a claim on a foreign corporation comes back, which is what a financial outflow is. A turns an asset purchase into a service export. C ignores that something was received in exchange, which is the test a transfer fails. D files an asset as a consumption good, and E hands a private purchase to the official sector, where only reserve transactions belong.

Question 9

Question 9 of 15

A cross-border payment belongs to net transfers rather than to trade or primary income when it is

A transfer moves purchasing power one way, with no good, service, or asset coming back, which is exactly what a remittance does. A and C are trade in goods and services, B is income earned on capital lent abroad, and D buys a financial claim that the financial account records.
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E. a remittance sent abroad with nothing received in return

A transfer moves purchasing power one way, with no good, service, or asset coming back, which is exactly what a remittance does. A and C are trade in goods and services, B is income earned on capital lent abroad, and D buys a financial claim that the financial account records.

Question 10

Question 10 of 15

The domestic real interest rate rises relative to foreign real interest rates. Which foreign-exchange change is most likely?

A higher domestic real return attracts foreign funds into domestic financial assets. Foreign investors must acquire the domestic currency, so its demand shifts right and the currency appreciates. Choice A reverses the capital flow. Choices B and C move the supply curve for reasons unrelated to the stated asset purchase. Choice E incorrectly isolates loanable funds from international capital flows.
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D. Demand for the domestic currency increases as foreign investors buy domestic assets.

A higher domestic real return attracts foreign funds into domestic financial assets. Foreign investors must acquire the domestic currency, so its demand shifts right and the currency appreciates. Choice A reverses the capital flow. Choices B and C move the supply curve for reasons unrelated to the stated asset purchase. Choice E incorrectly isolates loanable funds from international capital flows.

Question 11

Question 11 of 15

Domestic consumers develop a stronger preference for imported goods. In the foreign-exchange market for the domestic currency, this change will

Buying more imports requires domestic residents to exchange more domestic currency for foreign currency, so the supply of the domestic currency shifts right and it depreciates. Choices A and B move currency demand, which represents foreigners' purchases of domestic goods or assets. Choice C treats a determinant as movement along demand, and Choice D reverses the supply shift.
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E. shift supply of the domestic currency right

Buying more imports requires domestic residents to exchange more domestic currency for foreign currency, so the supply of the domestic currency shifts right and it depreciates. Choices A and B move currency demand, which represents foreigners' purchases of domestic goods or assets. Choice C treats a determinant as movement along demand, and Choice D reverses the supply shift.

Question 12

Question 12 of 15

Under floating exchange rates, part of a fiscal expansion is crowded out abroad because higher domestic interest rates encourage

Government borrowing pushes interest rates up, foreign funds chase the higher return, and the demand for the currency raises its value, which makes exports dearer abroad and imports cheaper at home. Net exports fall and cancel part of the stimulus. A and C send the capital the wrong way, so the currency moves the wrong way with it. D answers a demand policy with a supply-side result, and E has the trade balance improving, which would add to the expansion rather than damp it.
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B. capital inflow, appreciation, and lower net exports

Government borrowing pushes interest rates up, foreign funds chase the higher return, and the demand for the currency raises its value, which makes exports dearer abroad and imports cheaper at home. Net exports fall and cancel part of the stimulus. A and C send the capital the wrong way, so the currency moves the wrong way with it. D answers a demand policy with a supply-side result, and E has the trade balance improving, which would add to the expansion rather than damp it.

Question 13

Question 13 of 15

Which of the following chains of effects is consistent with contractionary monetary policy under floating exchange rates?

Tighter policy raises domestic returns, draws financial inflows, strengthens the currency, and cuts net exports, so the exchange rate reinforces the contraction rather than blunting it. B and D start from falling rates, which belongs to an easing. C pairs rising rates with an outflow, reversing the direction capital moves toward the higher return, and E denies that policy moves the interest rate at all, which is the step the whole chain hangs on.
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A. Rates rise, capital flows in, the currency appreciates, and net exports fall.

Tighter policy raises domestic returns, draws financial inflows, strengthens the currency, and cuts net exports, so the exchange rate reinforces the contraction rather than blunting it. B and D start from falling rates, which belongs to an easing. C pairs rising rates with an outflow, reversing the direction capital moves toward the higher return, and E denies that policy moves the interest rate at all, which is the step the whole chain hangs on.

Question 14

Question 14 of 15

Income rises in a major foreign trading partner, increasing its purchases of domestic exports. What happens in the market for the domestic currency?

Higher foreign income raises foreign demand for domestic exports. Foreign buyers demand more domestic currency to pay for those exports, shifting currency demand right and causing appreciation. Choices A and B reverse both the relevant curve and direction. Choice D shifts supply even though the transaction begins with foreign buyers. Choice E confuses an off-axis determinant with movement along a fixed curve.
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C. Demand shifts right and the currency appreciates.

Higher foreign income raises foreign demand for domestic exports. Foreign buyers demand more domestic currency to pay for those exports, shifting currency demand right and causing appreciation. Choices A and B reverse both the relevant curve and direction. Choice D shifts supply even though the transaction begins with foreign buyers. Choice E confuses an off-axis determinant with movement along a fixed curve.

Question 15

Question 15 of 15

The domestic real interest rate falls below comparable foreign real interest rates. Which chain is most likely?

The lower domestic real return encourages funds to leave for foreign assets. Residents supply more domestic currency to obtain foreign currency, shifting domestic-currency supply right and causing depreciation. Choices A and B reverse the capital flow. Choice C pairs outflow with a leftward supply shift. Choice E ignores that investors compare expected real returns across countries.
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D. Capital outflow, higher supply of the domestic currency, and depreciation

The lower domestic real return encourages funds to leave for foreign assets. Residents supply more domestic currency to obtain foreign currency, shifting domestic-currency supply right and causing depreciation. Choices A and B reverse the capital flow. Choice C pairs outflow with a leftward supply shift. Choice E ignores that investors compare expected real returns across countries.

Quiz complete