AP Macroeconomics : How to find exchange rate

Study concepts, example questions & explanations for AP Macroeconomics

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Example Questions

Example Question #1 : How To Find Exchange Rate

Assume the exchange rate from Mexican pesos to American dollars is 8 pesos to $1.

If a bushel of wheat is 12 pesos in Mexico, how many bushels in Mexico could $1200 buy?

Possible Answers:

1800 bushels

800 bushels

1000 bushels

400 bushels

1260 bushels

Correct answer:

800 bushels

Explanation:

There are 8 pesos to the dollar, so multiply 1200 by 8 to get the number of pesos. A bushel costs 12 pesos, so divide by 12 to get 800 bushels. 

Example Question #2 : How To Find Exchange Rate

A country with a high rate of return on investments will likely see which of the following?

Possible Answers:

Currency depreciates in value

Currency appreciates in value

Exports increase

Increase in emigration

Government bond rating decreases

Correct answer:

Currency appreciates in value

Explanation:

If a nation has an excellent return on investments, that makes investing in that nation more appealing to foreign and domestic investors. Foreigners will exchange their currencies for the currency of the nation with a high rate of return. Domestic investors may take their investments out of foreign markets and invest domestically to take advantage of the high rate of return. This leads to a high demand for the demand currency, meaning people are willing to pay more to recieve that currency. This causes the currency to appreciate in value. 

Example Question #3 : How To Find Exchange Rate

Choose the correct statement about exchange rates.

Possible Answers:

A forward exchange rate is the rate of currency exchange for a future transaction, while a spot exchange rate is the rate of currency exchange for an immediate transaction.

A forward exchange rate is the rate of currency exchange for an immediate transaction, while a spot exchange rate is the rate of currency exchange for a future transaction.

A forward exchange rate is the rate of currency exchange based on Gross Domestic Product, while a spot exchange rate is the rate of currency exchange based on the inflation rate.

A forward exchange rate is the rate of currency exchange for a select few stable currencies, while a spot exchange rate is the rate of currency exchange for all other currencies.

A forward exchange rate is the rate of currency exchange based on future projections, while a spot exchange rate is the rate of currency exchange based on past trends.

Correct answer:

A forward exchange rate is the rate of currency exchange for a future transaction, while a spot exchange rate is the rate of currency exchange for an immediate transaction.

Explanation:

Because an exchange rate is a fluid marker of the equivalent value of two different currencies, two different measures of an exchange rate are necessary. When a transaction is necessary in the moment, the current exchange rate, or a present marker of relative value between currencies, is used. When the transaction is made but scheduled for exchange on a future date, the forward exchange rate, or a projection of future relative value based on recent trends, is used as the exchange rate.

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