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AP Macroeconomics 6.4: Policy and Economic Conditions in FX Markets

Analyze how trade, income, fiscal policy, monetary policy, and capital flows shift currency demand or supply and change exchange rates.

Syllabus
Effective Fall 2025
Course
AP Macroeconomics

Covered syllabus points

MKT-5.E—a. Explain (using graphs as appropriate) the determinants of currency demand and supply. b. Explain (using graphs as appropriate)…

6.4 Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market question 1

[Maximum number: 3]

Assume that the economy of Vortania is in long-run equilibrium.

Question (a)

(a)

Vortania and Rhodara are trading partners with flexible exchange rates. The currency of

Vortania is the Vortanian crown (VTC), and the currency of Rhodara is the Rhodaran mark

(RHM). Assume that Vortania's capital and financial account (CFA) balance is zero. Now

assume that Vortania imposes new tariffs on imports from Rhodara. Draw a correctly labeled

graph of the foreign exchange market for the Vortanian crown, and show the effect of the

tariffs on the SUPPLY of the Vortanian crown and the international value of the Vortanian

crown.

[ 2 ]

Question (b)

(b)

Assume the central bank of Vortania wants to return the Vortanian crown to its international

value before the imposition of the tariffs. Would the central bank buy or sell Vortanian

crowns in the foreign exchange market? Explain.

[ 1 ]
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