Winston-Salem/Forsyth County Schools



AP Macroeconomics Section 8 Practice Test

1. An open economy is an economy:

|A. |which trades goods and services with other countries. |

|B. |which does not regulate its industries. |

|C. |which does not impose taxes on its citizens. |

|D. |where freedom of speech and religion can be practiced freely. |

|E. |which does not engage in trade with other countries. |

2. Open-economy macroeconomics is the branch of economics that deals with:

|A. |reducing regulations on business. |

|B. |the relationships between economies of different nations. |

|C. |reducing employment discrimination. |

|D. |the provision of financial information to investors. |

|E. |productivity and growth. |

|Chevrolet Motor Co. expands its operations by acquiring Hyundai Co. |$21,000 |

|Chinese manufacturers sell t-shirts to L.L. Bean |2,000 |

|The Bill Gates Foundation contributes to UNICEF’s anti-polio fund |80,000 |

|A German car collector buys a Kentucky-made Corvette |50,000 |

|Microsoft pays dividends to European stock holders |2,000 |

|A Japanese student enrolls at Princeton and pays tuition |3,000 |

|A U.S. mutual fund receives dividends from its European stock holdings |2,000 |

|American Express Co. acquires the Banco de Lisboa |30,000 |

|Table 41-1: International Transactions |

3. Use Table 41-1. The balance of payments on goods and services is:

|A. |$51,000. |

|B. |$48,000. |

|C. |$3,000. |

|D. |–$29,000. |

|E. |$55,000. |

4. If the United States exports $100 billion of goods and services and imports $150 billion of goods and services and there is no other factor income or transfers, the balance on the financial account is:

|A. |$250 billion. |

|B. |–$250 billion. |

|C. |$50 billion. |

|D. |–$50 billion. |

|E. |zero. |

5. A country's balance of payments on financial account is the:

|A. |difference between the dollar value of a country's exports and imports of goods and services. |

|B. |difference between the dollar value of a country's exports and imports of goods only. |

|C. |difference between the country's sale of assets to foreigners and the purchases of assets from foreigners. |

|D. |same value as the country's merchandise trade balance. |

|E. |difference between the country’s government spending and tax revenue. |

6. Suppose that the value of the euro fell from $1.47 on January 1, 2009 to $1.40 on January 12, 2009. This implies that:

|A. |The euro depreciated and the dollar appreciated during this period of time. |

|B. |The dollar depreciated and the euro appreciated during this period of time. |

|C. |The euro depreciated and there is insufficient information about the dollar's value during this period of time. |

|D. |The euro appreciated and there is insufficient information about the dollar's value during this period of time. |

|E. |Both the euro and dollar appreciated during this period of time. |

Scenario 42-1: Exchange Rates

The value of a euro, the currency for most of Europe, goes from 1€ = US$1.25 to 1€ = US$1.50.

7. Use Scenario 42-1. The dollar has:

|A. |depreciated. |

|B. |appreciated. |

|C. |been revalued. |

|D. |not been affected for use in international trade. |

|E. |risen in value relative to the euro. |

8. If the exchange rate is $1 = ¥110, a $20,000 Ford truck costs _________ in Japan.

|A. |¥20,000 |

|B. |¥18,182 |

|C. |¥2,200,000 |

|D. |¥3,000,000 |

|E. |¥4.400,000 |

9. Suppose that the U.S. and European Union (EU) are the only trading partners in the world. If the U.S. lowers import restrictions from the EU, we would expect:

|A. |the demand for euros to increase, appreciating the euro. |

|B. |the demand for the dollar to increase, appreciating the dollar. |

|C. |the supply of dollars to increase, appreciating the dollar. |

|D. |the supply of euros to increase, depreciating the euro. |

|E. |the demand for euros to decrease, depreciating the euro. |

Figure 42-1: Change in the Demand for U.S. Dollars

[pic]

10. Use the “Change in the Demand for U.S. Dollars” Figure 42-1. A flow of capital from Europe to the United States would cause a movement in this foreign exchange market that is best represented by the shift from:

|A. |D2 to D1. |

|B. |E2 to E1. |

|C. |D1 to D2. |

|D. |There would be no shift in the foreign exchange market. |

|E. |X2 to X1. |

11. The rule that governs a country's policy toward its exchange rate is known as:

|A. |the fixed exchange rate system. |

|B. |the floating exchange rate system. |

|C. |an exchange rate regime. |

|D. |the rules of exchange. |

|E. |the purchasing power parity system. |

12. Fixed exchange rates are determined by the:

|A. |policies of the domestic government. |

|B. |forces of demand and supply in the developed countries. |

|C. |forces of demand and supply in the foreign exchange market. |

|D. |forces of demand and supply in the domestic money market. |

|E. |policies of the World Bank. |

13. One of the advantages of adopting a fixed exchange rate system is that:

|A. |it reduces uncertainty. |

|B. |it reduces the need for fiscal policy. |

|C. |it increases the strength of monetary policy. |

|D. |it does not require the country to maintain any large foreign exchange reserve. |

|E. |it eliminates the role of monetary policy. |

14. A major drawback of adopting a floating exchange rate is the:

|A. |opportunity cost associated with the accumulation of foreign exchange reserves. |

|B. |uncertainty about the value of goods traded internationally. |

|C. |increased discipline brought on monetary policy. |

|D. |distorted incentives imposed on the normal flow of imports and exports. |

|E. |inability of domestic citizens to afford international travel. |

15. When a government wishes to target its exchange rate, it can do so only if:

|A. |the country is willing to give up its use of monetary policy for stabilization purposes. |

|B. |it continues to actively use monetary policy for exchange market intervention and stabilization purposes. |

|C. |it increases the amount of uncertainty in the foreign exchange markets. |

|D. |pursues policies that tend to be inflationary. |

|E. |the country is willing to give up its use of fiscal policy for stabilization purposes. |

16. Devaluation of a currency occurs under _____ exchange rates when the price of the domestic currency in terms of foreign currency _____.

|A. |flexible; falls |

|B. |flexible; rises |

|C. |fixed; falls |

|D. |fixed; rises |

|E. |flexible; remains constant |

17. A decrease in U.S. interest rates causes the dollar to _____ and aggregate demand to ______.

|A. |depreciate; increase |

|B. |depreciate; decrease |

|C. |appreciate; increase |

|D. |appreciate; decrease |

|E. |depreciate; remain constant |

18. Under fixed exchange rates, a devaluation:

|A. |decreases aggregate demand. |

|B. |increases aggregate demand. |

|C. |decreases short-run aggregate supply. |

|D. |increases short-run aggregate supply. |

|E. |increases long-run aggregate supply. |

19. Devaluation is the:

|A. |reduction in the value of a currency due to inflation. |

|B. |reduction in the value of a currency that is determined in a floating exchange rate system. |

|C. |reduction in the value of a currency due to increased interest rates. |

|D. |reduction in the rate of inflation of a country. |

|E. |reduction in the value of a currency that is set under a fixed exchange rate regime. |

20. Countries A and B are important trading partners. Country A is experiencing a recession. Country B will be better insulated from the recession originating in country A, if:

|A. |Country B has a fixed exchange rate system. |

|B. |Country B has a floating exchange rate system. |

|C. |Country A has a fixed exchange rate system. |

|D. |Country A has a floating exchange rate system. |

|E. |Country B moves to the gold standard. |

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