AP_Krugman_Textbook

430 section 8 The Open Economy: International Trade and Finance

Tackle the Test: Multiple-Choice Questions

1. When the U.S. dollar buys more Japanese yen, the U.S. dollar has
   I. become more valuable in terms of the yen.
   II. appreciated.
   III. depreciated
   a. I only
   b. II only
   c. III only
   d. I and II only
   e. I and III only


2. The nominal exchange rate at which a given basket of goods
   and services would cost the same in each country describes
   a. the international consumer price index (ICPI).
   b. appreciation.
   c. depreciation.
   d. purchasing power parity.
   e. the balance of payments on the current account.


3. What happens to the real exchange rate between the euro and
   the U.S. dollar (expressed as euros per dollar) if the aggregate
   price levels in Europe and the United States both fall? It
   a. is unaffected.
   b. increases.
   c. decreases.
   d. may increase, decrease, or stay the same.
   e. cannot be calculated.
   4. Which of the following would cause the real exchange rate
   between pesos and U.S. dollars (in terms of pesos per dollar) to
   decrease?
   a. an increase in net capital flows from Mexico to the United
   States
   b. an increase in the real interest rate in Mexico relative to the
   United States
   c. a doubling of prices in both Mexico and the United States
   d. a decrease in oil exports from Mexico to the United States
   e. an increase in the balance of payments on the current
   account in the United States
   5. Which of the following will decrease the supply of U.S. dollars
   in the foreign exchange market?
   a. U.S. residents increase their travel abroad.
   b. U.S. consumers demand fewer imports.
   c. Foreigners increase their demand for U.S. goods.
   d. Foreigners increase their travel to the United States.
   e. Foreign investors see increased investment opportunities in
   the United States.

Tackle the Test: Free-Response Questions

1 point:The axes are labeled “Exchange rate (yen per U.S. dollar)” and

“Quantity of U.S. dollars”.

1 point:The supply of U.S. dollars is labeled and slopes upward.

1 point:The demand for U.S. dollars is labeled and slopes downward.

1 point:The initial equilibrium exchange rate is found at the intersection of

the initial supply and demand curves and is shown on the vertical axis.

1 point:The new demand for U.S. dollars is to the left of the initial demand.

1 point:The new equilibrium exchange rate is found where the initial supply

curve and new demand curve intersect and is shown on the vertical axis.

1 point:The U.S. dollar has depreciated.

2. Use a correctly labeled graph of the foreign exchange market
   between the U.S. and Europe to illustrate what would happen
   to the value of the U.S. dollar if there were an increase in the
   U.S. demand for imports from Europe.


3. Draw a correctly labeled graph of the foreign exchange market
   showing the effect on the equilibrium exchange rate between
   the U.S. and Japan (the number of yen per U.S. dollar) if
   capital flows from Japan to the United States decrease due to
   a change in the preferences of Japanese investors. Has the U.S.
   dollar appreciated or depreciated?

Answer (7 points)

Exchange rate
(yen per
U.S. dollar)

E 1

E 2

Supply of

U.S. dollars

D 2

D 1

XR 2

XR 1

Quantity of U.S. dollars