AP MACROECONOMICS: UNIT 6 TEST REVIEW VOCABULARY (approx. 65-70 percent of objective section of test) TOPICS 1. Balance of Payments: Current Acct vs. Capital Acct Balances. Current Acct. Balance + Capital Account Balance = 0 Be able to use terms like Trade Deficit and Trade Surplus to demonstrate an understanding of the relationship between the values of a nations exports vs. the value of its imports. 2. Arguments for and against Free Trade a. In favor: Trade based on Comparative Advantage (only producing those products with the lowest opportunity costs) -lower global prices = higher global standard of living -increased competition leading to more efficient use of resources -jobs saved thru protectionism not equal to the cost of higher prices (from tariffs/quotas etc….) b. Against Pure Free Trade -National Security Argument -Infant Industry Argument -Strategic Trade Justification 3. Reason for the unpopularity of the IMF and the World Bank in the developing world -Use of “austerity measures” as a condition for aid. ****The key to the first part of Unit 6 is an understanding of the related vocabulary. INTERNATIONAL EXCHANGE MARKETS 1. Terms that describe the increase and decrease in value of currency (in both Fixed and Floating exchange situations)-essential vocabulary. (Revaluation, Devaluation vs. Appreciation and Depreciation) 2. Review of the Factors that affect the demand for currency a. Relative changes in Price Level b. Relative changes in GDP Growth (National Income) c. Relative changes in Interest Rates d. Relative attraction of other investments 3. Effect that changes in the value of currency have on exports and imports. 4. Relationship between the demand of a currency and its supply in the international exchange market. -If the demand for a currency increases/the supply of that currency decreases -If the demand for a currency decreases/the supply of that currency increases 5. Capital Flows -When the demand for a currency increases it flows out of the international exchange market and into the country where it is demanded. -When the demand for a currency decreases it flows out of its country of origin and into the international exchange market (to buy the currency that is in higher demand) 6. Affect that fiscal and monetary policy have on the demand for currency Key is the effect expansionary/contractionary policy has on Price Level, GDP (National Income) and Interest Rates. Expansionary Fiscal Expansionary Monetary Raises GDP (National Income) Raises GDP Raises Price Level Raises Price Level Lowers Interest Rates ****All of these tend to lower the demand for money and its value. Contractionary Fiscal Contractionary Monetary Lowers GDP (National Income) Lowers GDP Lowers Price Level Lowers Price Level Raises Interest Rates ****All of these tend to increase the demand for money and its value. 7. Affect that changes in the value of money have on AD and AS Appreciation Lowers AD by lowering Net Exports (products become relatively more expensive) Raises SRAS by making it less expensive to buy imported factors of production (i.e. imported energy-oil, steel, etc…) Depreciation Raises AD by raising Net Exports (products become relatively less expensive) Lower SRAS by making imported factors of production more expensive 8. Winners and Losers with the change in the value of money. A. Appreciation of the US Dollar Winners Losers 1. Importers 1. Exporters 2. Americans traveling abroad 2. Foreign travelers coming to the US 3. Lenders (are being paid back with 3. Borrowers (paying back loans with More valuable dollars) more valuable dollars) B. Depreciation of the US Dollar 1. Exporters 1. Importers 2. Foreign travelers coming to the US 2. Americans Traveling Abroad 3. Borrowers (paying back loans with 3. Lenders (being paid back with less (Less valuable dollars) valuable dollars) Test will be a hybrid of objective with one free response question Objective: approx. 50 questions: matching and multiple choice. (65-70 percent vocabulary) Free Response Question: International Exchange Market Prompt will start with one of the four factors that affect the demand for either products or investments. Determine the change in demand for products or investments, change in the demand for money, and the value of money. Graph changes in demand. Infer changes in Supply and Capital Flows.