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AP Macroeconomics 6.6 Real Interest Rates and International Capital Flows Questions

Practise linking international real-rate differences to capital movement, currency markets, loanable funds, financial-account balances, monetary policy, and net exports.

Syllabus
Effective Fall 2022
Course
AP Macroeconomics

Exam points

  • use international real-rate differences to predict the direction of financial capital flows
  • trace capital inflows or outflows through currency demand or supply to appreciation or depreciation
  • connect net capital flows to the capital and financial account balance
  • show how international capital movement changes loanable-funds supply and tends to narrow real-rate gaps
  • analyse how central-bank policy or fiscal borrowing changes rates, capital flows, and currency values

Covered syllabus points

MKT-5.G—Explain (using graphs as appropriate) how differences in real interest rates across countries affect financial capital flows,…

Question 1

[Maximum number: 1]

Assume that the economy of Barrikos is in short-run equilibrium, with its economic data summarized in the table provided. The government budget is balanced, and the capital and financial account (CFA) balance is zero.

Table for Question 1 — AP Macroeconomics

Barrikos has an open economy and a flexible exchange rate. Based solely on the change in the real interest rate in Barrikos shown on your graph in part D (iii), will Barrikos' capital and financial account (CFA) balance move into surplus, move into deficit, or remain the same? Explain.

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