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

What AP Macroeconomics Unit 6 covers

The College Board Course and Exam Description breaks Unit 6 into 6 topics:

1. 6.1 Balance of Payments Accounts
2. 6.2 Exchange Rates
3. 6.3 The Foreign Exchange Market
4. 6.4 Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market
5. 6.5 Changes in the Foreign Exchange Market and Net Exports
6. 6.6 Real Interest Rates and International Capital Flows

AP Macroeconomics Unit 6 practice questions

• The news says ‘the US trade deficit with China hit $300 billion.’ What account in the balance of payments tracks this — and what else does it include besides goods?

  The current account — chiefly net exports. It also includes net income from abroad and net unilateral transfers (aid, remittances).

• China uses the dollars it earns from exporting to buy US Treasury bonds and American real estate. What account tracks these transactions?

  The capital/financial account (CFA) tracks asset trades. It records cross-border purchases of stocks, bonds, real estate, and direct investment.

• What is the balance of payments identity, and why must it always hold?

  CA + CFA = 0 — the two accounts must sum to zero. A current account deficit forces an equal capital account surplus.

• The US has a large current account deficit with China. What must be true about its capital/financial account with China?

  The US must have a capital/financial account SURPLUS with China. China receives all those US dollars from exports and uses them to buy American assets (Treasury bonds, stocks, real estate). Money out for goods = money in for investments.

• You’re traveling to Japan and 1 dollar gets you 110 yen. Your friend goes a month later and 1 dollar only gets 95 yen. What happened — and what do economists call this price?

  The exchange rate: one currency's price in another. It's set by supply and demand in the foreign exchange market.

• Last month $1 bought 100 yen. This month $1 buys 120 yen. Did the dollar get stronger or weaker — and what happened to the yen?

  Appreciation = a currency strengthens; depreciation = it weakens. Two currencies can't both appreciate against each other — one rises, the other falls.

• If 1 US dollar = 110 Japanese yen, how many dollars does 1 yen cost?

  1 yen = 1/110 dollars ≈ $0.0091. To convert, take the reciprocal. If you know one exchange rate, flip it to get the other direction.

• In the foreign exchange market for US dollars, who demands dollars and who supplies them?

  Foreigners demand dollars; Americans are the ones who supply them. Foreigners need dollars to buy US goods/assets; Americans supply dollars to buy foreign ones.

+ 20 more AP Macroeconomics cards in the app.

Key terms in Unit 6

These 12 terms show up in the Unit 6 cards. Each one links to its definition in the AP Macroeconomics key-term reference.

• appreciation
• crowding out
• depreciation
• equilibrium
• exchange rate
• fiscal policy
• indeterminate
• inflation
• monetary policy
• money supply
• multiplier effect
• recession