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Back to Unit 6 Cheat Sheet

Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market

AP Macro - 6.4

Expansionary monetary policy (lower interest rates) causes currency depreciation through capital outflows. Expansionary fiscal policy (higher interest rates from borrowing) causes currency appreciation through capital inflows. Economic conditions and expectations also affect exchange rates.

Ultimate Flashcard Review

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Policy Action and Currency Value

Key Concepts to Understand

Question 1 of 3

Expansionary monetary policy will impact nominal interest rates and real interest rates in which of the following ways?

NIR will decrease and RIR will increase
NIR will increase and RIR will decrease
Both NIR and RIR will increase
Both NIR and RIR will decrease

Practice Questions: Test Your Understanding

Apply what you've learned with these practice questions. These questions test your understanding of the key concepts.

Question 1 of 3

Suppose the foreign exchange market for the Mexican Peso (MXN) experiences a simultaneous increase in demand and decrease in supply. What is the likely impact on the value of the Peso?

The Peso will depreciate.
The Peso will appreciate.
The value of the Peso will remain unchanged.
The impact on the Peso's value is indeterminate.
The quantity traded will decrease.

Key Takeaways

  • 📊
    Master the fundamentals: Understanding these core concepts is essential for success in AP Economics.
  • ✅
    Practice makes perfect: Use the interactive exercises and practice questions to reinforce your understanding.