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
If the U.S. dollar appreciates against the euro, what happens to U.S. exports to Europe?
Answer: U.S. exports become more expensive for Europeans
A stronger dollar makes U.S. goods more expensive in foreign currency terms, reducing demand for U.S. exports.
Which of the following would cause the U.S. current account deficit to widen?
Answer: A decrease in U.S. domestic savings relative to investment
A current account deficit equals the gap between domestic investment and domestic savings; when savings fall relative to investment, the deficit widens.
Under a fixed exchange rate system, if a country's currency is overvalued, the central bank must:
Answer: Sell foreign currency reserves to buy domestic currency
To defend an overvalued currency, the central bank sells foreign reserves and buys its own currency to maintain the fixed peg.
The J-curve effect describes the phenomenon where a currency depreciation initially:
Answer: Worsens the trade balance before improving it
The J-curve occurs because import/export quantities adjust slowly, so the trade balance worsens before improving after depreciation.
If Brazil runs a capital account surplus, which of the following must be true?
Answer: Brazil is receiving more capital inflows than outflows
A capital account surplus means a country receives more capital investment from abroad than it sends out.
Purchasing Power Parity (PPP) theory predicts that in the long run, exchange rates adjust so that:
Answer: A basket of goods costs the same in all countries when expressed in a common currency
PPP holds that exchange rates adjust to equalize price levels across countries when measured in a common currency.
Which of the following best explains why a country with high inflation tends to see its currency depreciate?
Answer: High inflation erodes purchasing power, making domestic goods relatively more expensive abroad
Inflation erodes a currency's purchasing power, making a country's exports less competitive and causing the exchange rate to fall.