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AP Macroeconomics 6.4 Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market Questions

Practise analysing how trade, income, prices, interest rates, macroeconomic policy, tariffs, and currency intervention shift foreign-exchange equilibrium.

Syllabus
Effective Fall 2022
Course
AP Macroeconomics

Exam points

  • shift currency demand or supply and label the new equilibrium exchange rate and currency value
  • trace changes in income, tastes, imports, or exports through paired currency markets
  • explain how relative prices or inflation alter trade demand and currency appreciation or depreciation
  • connect real-interest-rate changes to international capital flows and currency demand
  • separate fiscal-policy income, price, and rate channels from monetary-policy capital-flow effects

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)…

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.

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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.

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