Download AP Macroeconomics

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. _________________.