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AP Macroeconomics Course Review 7 1. To make sure you understand the components of the current account, the capital account and the difference between credit (transaction that earns foreign exchange) and a debit (transaction that uses foreign currency), identify each of the following transactions on the U.S. balance of payments. Complete the table below by putting an (x) mark in the appropriate boxes for credit or debit and for capital or current account. The first one has been done for you. Credit(+) Debit (-) Current Capital Account Account Harley Davidson USA purchases $25 million in production machinery from a Japanese company. A Chinese company sells $1 million worth of berets to the U.S. Army. BMW pays $1 million to a U.S. shipper for transporting cars from Germany to the United States. Each month, Jose Louis, who recently arrived in the United States, sends half his paycheck to his wife in Mexico. Bank of America pays $5 million in interest to French depositors. Sean Walton’s Production Possibilities Table Product A B C Trousers 75 60 45 Jackets 0 10 20 D 30 30 Patrick Walton’s Production Possibilities Table Product A B C D E F Trousers 60 50 40 30 20 10 Jackets 0 5 10 15 20 25 G 0 30 E 15 40 F 0 50 2. To Sean, the cost of producing one pair of trousers is _________________ jackets. And the cost of one jacket is ___________ pairs of trousers. To Patrick, the cost of producing one pair of trousers is __________ jackets. And the cost of one jacket is _________ pairs of trousers. If Sean and Patrick were to form a partnership called F&D’s suits, ____________ should specialize in the making of trousers because he can make a pair of trousers like nobodies business. And _____________ should specialize in jackets because he is the “Jacket King”! Without specialization, Sean and Patrick were able to make 50 pairs of trousers and 50 jackets. If each specializes completely in the item that each has a comparative advantage, their combined production will be ___________ pairs of trousers and ____________ jackets. When Sean and Patrick come to divide the income of the partnership between them, the manufacture of a pair of trousers should be treated as the equivalent of from ________ to __________ jackets. 3. The following table shows supply and demand schedules for the British pound. Quantity of Quantity of pounds supplied Price pounds demanded 400 $5.00 100 360 $4.50 200 300 $4.00 300 286 $3.50 400 267 $3.00 500 240 $2.50 620 200 $2.00 788 If the exchange rates are flexible, what will be the rate of exchange for the pound, and what will be the rate of exchange for the dollar? _______________________ How many pounds will be purchased in the market, and how many dollars will be purchased in the market? __________________________________ 4. For each of the following situations, explain the effect of the event on the value of the U.S. dollar in relation to the Mexican peso. Draw a supply and demand graph to illustrate each situation. Then to the right explain the reason for shift. Americans increase their demand for Mexican tomatoes. Dollar Price of Pesos S _______________________ _______________________ _______________________ _______________________ D Quantity of Pesos _______________________ Inflation in Mexico rises at a higher rate than in the United States. S ________________________ Dollar Price of Pesos ________________________ ________________________ ________________________ D ________________________ Quantity of Pesos Americans increase their investments in Mexico because they feel the Mexican economy will be strong. Dollar Price of Pesos S ________________________ ________________________ ________________________ ________________________ D Quantity of Pesos Country Canada France Germany Japan Mexico Norway Thailand Currency per U.S. $ Currency Year 1 Year2 Dollar 1.41 1.51 Franc 5.44 5.22 Mark 1.58 1.69 Yen 100.15 110.23 Peso 4.65 5.09 Krone 6.88 6.49 Bhat 25.12 23.22 5. In the far right column of the table, indicate whether the U.S. dollar has appreciated (A) or depreciated (D) from year 1 to year 2. A or D ______ ______ ______ ______ ______ ______ ______ 6. Using the exchange rate shown for year 1, what would be the U.S. dollar cost for the following products? A. Japanese television costing 30,000 yen $__________ B. French scarf costing 600 francs $__________ C. Tai artwork costing 3,768 bhats $__________ D. German auto costing 79,000 marks $__________ E. Mexican silver bracelet costing 1,376 pesos $__________ 7. Japan’s fiscal policies lead to an increase in Japan’s real GDP. Explain the affects of this policy to trade between the U.S. and Japan? _______________________________________________________________ D Quantity of Dollars Graph B S U.S./Yen Exchange Rate Yen/US Dollar Exchange Rate Show the affect of this policy below. Graph A S D Quantity of Japanese Yen In graph A, what happened to the U.S. dollar? ______________________ In graph B, what happened to the Japanese Yen? ____________________ As a result of this fiscal policy; 1. U.S. exports _______________, imports ________________. 2. U.S. aggregate demand shifted ______________. 3. Price levels in the U.S. _________________.