AP Macroeconomics Flashcards: Exchange Rates

What this deck covers

This deck focuses on Exchange Rates, giving you a quick way to review the definitions, rules, and examples that matter most for AP Macroeconomics.

How to use these flashcards

Work through these flashcards in short sessions. Try to answer each prompt before flipping the card, then revisit any cards you miss until the explanation feels automatic.

Flashcard 1: How does a country's trade balance affect exchange rates?

Answer: Trade surpluses increase currency demand. Exports create demand for domestic currency.

Flashcard 2: How do speculative activities impact exchange rates?

Answer: Can cause volatility and rapid changes. Large trades can move exchange rates significantly.

Flashcard 3: What is the effect of high inflation on a country's currency value?

Answer: Currency value tends to depreciate. Rising prices reduce purchasing power.

Flashcard 4: State the effect of an increase in foreign investment on a currency.

Answer: Currency tends to appreciate. Capital inflows increase currency demand.

Flashcard 5: What is the main purpose of foreign exchange reserves?

Answer: Stabilize the national currency. Used to intervene in currency markets.

Flashcard 6: Identify a tool used by central banks to influence exchange rates.

Answer: Interest rate policy. Changes rates to affect currency demand.

Flashcard 7: What does the real exchange rate account for?

Answer: Adjusts nominal rate for inflation differences. Removes inflation effects from exchange rate.

Flashcard 8: What is the impact of capital controls on exchange rates?

Answer: Restricts currency flow, stabilizing rates. Government limits on currency transactions.

Flashcard 9: Identify the impact of exchange rate fluctuations on multinational corporations.

Answer: Affects profits and competitiveness. Exchange rate changes alter international costs.

Flashcard 10: What is a currency peg?

Answer: A policy of fixing the exchange rate to another currency. Maintains stable exchange rate with reference currency.

Flashcard 11: Which term describes when a currency's value increases relative to another?

Answer: Appreciation. Currency becomes stronger and more valuable.

Flashcard 12: How does political stability affect a country's currency?

Answer: Greater stability tends to strengthen the currency. Stable governments attract more investment.

Flashcard 13: What is an exchange rate band?

Answer: A system allowing currency to fluctuate within set limits. Managed float with upper and lower bounds.

Flashcard 14: What does it mean if a currency is undervalued?

Answer: Its market value is lower than its fundamental value. Currency price below economic fundamentals.

Flashcard 15: How do tariffs influence exchange rates?

Answer: Can strengthen domestic currency by reducing imports. Reduced imports increase domestic currency demand.

Flashcard 16: What is a spot exchange rate?

Answer: Rate for immediate currency exchange. Current market price for currency exchange.

Flashcard 17: What is the main purpose of foreign exchange reserves?

Answer: Stabilize the national currency. Used to intervene in currency markets.

Flashcard 18: State the formula to convert foreign currency to domestic currency.

Answer: Domestic = Foreign × Exchange Rate. Multiply foreign amount by exchange rate.

Flashcard 19: What is the effect of high inflation on a country's currency value?

Answer: Currency value tends to depreciate. Rising prices reduce purchasing power.

Flashcard 20: What impact does a strong currency have on tourism?

Answer: Decreases attractiveness for foreign tourists. Higher costs deter international visitors.

Flashcard 21: What is the definition of an exchange rate?

Answer: The price of one currency in terms of another. Expresses how much of one currency equals another.

Flashcard 22: What is an exchange rate band?

Answer: A system allowing currency to fluctuate within set limits. Managed float with upper and lower bounds.

Flashcard 23: What is the impact of capital controls on exchange rates?

Answer: Restricts currency flow, stabilizing rates. Government limits on currency transactions.

Flashcard 24: What is meant by currency intervention?

Answer: Government action to influence currency value. Central bank buying/selling to affect rates.

Flashcard 25: Identify an effect of exchange rate volatility on businesses.

Answer: Increases financial risk. Unpredictable rates complicate planning and pricing.

Flashcard 26: What is currency speculation?

Answer: Buying/selling currencies to profit from rate changes. Trading currencies for potential profit.

Flashcard 27: State the law of one price in the context of exchange rates.

Answer: Identical goods should cost the same in different countries. Exchange rates adjust to eliminate price differences.

Flashcard 28: Which type of exchange rate regime allows a currency's value to be determined by the market?

Answer: Floating exchange rate. Market forces of supply and demand set value.

Flashcard 29: What does it mean if a currency is overvalued?

Answer: Its market value is higher than its fundamental value. Currency price exceeds economic fundamentals.

Flashcard 30: What is currency speculation?

Answer: Buying/selling currencies to profit from rate changes. Trading currencies for potential profit.

Flashcard 31: Identify the main factor influencing exchange rates in the short term.

Answer: Interest rates. Higher rates attract capital, strengthening currency.

Flashcard 32: What term is used when a currency's value decreases relative to another?

Answer: Depreciation. Currency becomes weaker and less valuable.

Flashcard 33: What is a forward exchange rate?

Answer: Rate agreed for currency exchange at a future date. Hedges against future exchange rate risk.

Flashcard 34: What is meant by currency intervention?

Answer: Government action to influence currency value. Central bank buying/selling to affect rates.

Flashcard 35: How do trade barriers affect exchange rates?

Answer: Reduce currency demand, potentially depreciating it. Barriers reduce trade and currency demand.

Flashcard 36: What is the impact of a deficit in the current account on a currency?

Answer: Currency tends to depreciate. More imports than exports weakens currency.

Flashcard 37: What is the impact of a higher exchange rate on the balance of trade?

Answer: Can lead to a trade deficit. Stronger currency reduces export competitiveness.

Flashcard 38: What is the effective exchange rate?

Answer: Weighted average of a currency against several others. Measures currency strength against trading partners.

Flashcard 39: Identify the effect of a currency depreciation on imports.

Answer: Imports become more expensive. Weaker currency makes foreign goods costlier.

Flashcard 40: How do speculative activities impact exchange rates?

Answer: Can cause volatility and rapid changes. Large trades can move exchange rates significantly.

Flashcard 41: What impact does a strong currency have on tourism?

Answer: Decreases attractiveness for foreign tourists. Higher costs deter international visitors.

Flashcard 42: Identify the main factor influencing exchange rates in the short term.

Answer: Interest rates. Higher rates attract capital, strengthening currency.

Flashcard 43: State the formula to convert domestic currency to foreign currency.

Answer: Foreign = Domestic ÷ Exchange Rate. Divide domestic amount by exchange rate.

Flashcard 44: Identify a tool used by central banks to influence exchange rates.

Answer: Interest rate policy. Changes rates to affect currency demand.

Flashcard 45: Identify the impact of exchange rate fluctuations on multinational corporations.

Answer: Affects profits and competitiveness. Exchange rate changes alter international costs.

Flashcard 46: State the effect of an increase in foreign investment on a currency.

Answer: Currency tends to appreciate. Capital inflows increase currency demand.

Flashcard 47: Identify the role of speculation in currency markets.

Answer: Influences supply and demand, affecting rates. Betting on future currency movements affects prices.

Flashcard 48: Identify the effect of a currency appreciation on exports.

Answer: Exports become more expensive. Stronger currency makes goods costlier abroad.

Flashcard 49: What does it mean if a currency is undervalued?

Answer: Its market value is lower than its fundamental value. Currency price below economic fundamentals.

Flashcard 50: How does a country's trade balance affect exchange rates?

Answer: Trade surpluses increase currency demand. Exports create demand for domestic currency.

Flashcard 51: What is a currency peg?

Answer: A policy of fixing the exchange rate to another currency. Maintains stable exchange rate with reference currency.

Flashcard 52: What is a spot exchange rate?

Answer: Rate for immediate currency exchange. Current market price for currency exchange.

Flashcard 53: How do tariffs influence exchange rates?

Answer: Can strengthen domestic currency by reducing imports. Reduced imports increase domestic currency demand.

Flashcard 54: Which type of exchange rate regime involves government intervention to maintain currency value?

Answer: Fixed exchange rate. Government controls currency value artificially.

Flashcard 55: State the formula to convert domestic currency to foreign currency.

Answer: Foreign = Domestic ÷ Exchange Rate. Divide domestic amount by exchange rate.

Flashcard 56: Which type of exchange rate regime allows a currency's value to be determined by the market?

Answer: Floating exchange rate. Market forces of supply and demand set value.

Flashcard 57: Identify the role of speculation in currency markets.

Answer: Influences supply and demand, affecting rates. Betting on future currency movements affects prices.

Flashcard 58: What is purchasing power parity (PPP)?

Answer: Theory that exchange rates adjust to equalize price levels. Long-run theory based on price level comparisons.

Flashcard 59: Identify the relationship between exchange rates and interest rate differentials.

Answer: Higher rates attract capital, appreciating currency. Capital flows to higher-yielding currencies.