AP Macro Unit Cheat Sheets
Key terms, formulas, and graphs for every unit.
Strengthen your mastery of Unit 6!
Test your knowledge with a full-length practice test.
Dojo Drills
6.1 - Balance of Payments Accounts
Key Terms & Definitions
Balance of Payments (BOP) Accounts
A summary of all international transactions (trade in goods/services and flow of assets) for a country in a given year.
- •Consists of two main accounts: the Current Account and the Financial Account.
Current Account (CA)
The account that measures the international trade in goods and services, net income from abroad, and net unilateral transfers.
- •CA = Net Exports + Net Income + Net Transfers
Net Income from Abroad
The difference between the income earned by a country's citizens in foreign countries and the income earned by foreigners in that country.
Net Unilateral Transfers
Payments from one country to another that do not correspond to the purchase of any good, service, or asset (e.g., foreign aid).
- •Money given to another country with nothing expected in return.
Trade Balance (Net Exports)
The difference between a country's total exports and total imports of goods and services.
- •Trade Surplus: Exports > Imports
- •Trade Deficit: Exports < Imports
Financial Account (or Capital Account)
Measures the purchase and sale of financial assets, such as stocks, bonds, and real estate, between a country and the rest of the world.
Capital Inflow / Outflow
The movement of financial assets (money) into or out of a country.
- •Inflow: Foreigners buy domestic assets (e.g., Chinese investor buys US stocks).
- •Outflow: Domestic citizens buy foreign assets (e.g., US bank buys Chinese bonds).
Current & Financial Account Relationship
The Current Account and the Financial Account must sum to zero (or balance), meaning a deficit in one account must be offset by a surplus in the other.
- •Example: If the US has a current account deficit with China (imports more than exports), it must have a corresponding financial account surplus (capital inflow) from China, as Chinese investors purchase US assets to balance the accounts.
- •This relationship reflects the fact that every dollar that flows out of one account must flow into the other.
6.2 - Exchange Rates
Key Terms & Definitions
Exchange Rate
The price of one country's currency in terms of another country's currency.
Currency Appreciation
An increase in the value of one currency relative to another currency.
- •Example: If $1 USD buys 100 Yen, and it changes to $1 USD buying 150 Yen, the USD has appreciated.
Currency Depreciation
A decrease in the value of one currency relative to another currency.
- •Example: If $1 USD buys 100 Yen, and it changes to $1 USD buying 150 Yen, the Yen has depreciated.
- •If one currency appreciates, the other must depreciate.
6.3 - The Foreign Exchange Market
Key Terms & Definitions
Foreign Exchange Market (FOREX)
The global marketplace where currencies are traded and exchange rates are determined by the interaction of supply and demand.
- •Influences the flow of goods, services, and financial capital.
Demand for Currency (in FOREX)
A downward-sloping curve showing the quantity of a currency demanded at various exchange rates.
- •Demand comes from foreigners who want to buy domestic goods, services, or financial assets.
Supply of Currency (in FOREX)
An upward-sloping curve showing the quantity of a currency supplied at various exchange rates.
- •Supply comes from domestic citizens who want to buy foreign goods, services, or financial assets.
Shifters of the FOREX Market
Factors that cause the demand for or supply of a currency to shift.
- •Changes in Tastes/Preferences (for goods)
- •Changes in relative Income
- •Changes in relative Price Level (Inflation)
- •Changes in relative Real Interest Rates
Checkpoint
Test your understanding of 6.1
The balance of payments accounts track:
Checkpoint
Test your understanding of 6.2
An appreciation of a currency means:
6.4 - Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market
Videos
Key Terms & Definitions
Shifters of the FOREX Market
Factors that cause the demand for or supply of a currency to shift.
- •Changes in Tastes/Preferences (for goods)
- •Changes in relative Income
- •Changes in relative Price Level (Inflation)
- •Changes in relative Real Interest Rates
Expansionary Fiscal Policy & Exchange Rate
How expansionary fiscal policy (deficit spending) affects the exchange rate through changes in real interest rates and capital flows.
- •G↑ or T↓ → Deficit → Borrowing↑ → Demand for Loanable Funds↑ → Real Interest Rate↑
- •Higher RIR → Capital Inflow↑ → Demand for Currency↑ → Currency Appreciates.
Contractionary Fiscal Policy & Exchange Rate
How contractionary fiscal policy (surplus) affects the exchange rate through changes in real interest rates and capital flows.
- •G↓ or T↑ → Surplus → Borrowing↓ → Demand for Loanable Funds↓ → Real Interest Rate↓
- •Lower RIR → Capital Outflow↑ → Supply of Currency↑ → Currency Depreciates.
Expansionary Monetary Policy & Exchange Rate
How expansionary monetary policy affects the exchange rate through changes in interest rates and capital flows.
- •MS↑ → Nominal Interest Rate↓ → Real Interest Rate↓
- •Lower RIR → Capital Outflow↑ → Supply of Currency↑ → Currency Depreciates.
Contractionary Monetary Policy & Exchange Rate
How contractionary monetary policy affects the exchange rate through changes in interest rates and capital flows.
- •MS↓ → Nominal Interest Rate↑ → Real Interest Rate↑
- •Higher RIR → Capital Inflow↑ → Demand for Currency↑ → Currency Appreciates.
Financial Capital Flows
The movement of money (financial capital) across borders as savers seek the highest possible real interest rate on their investments.
- •Money flows *towards* the country with the higher real interest rate.
Real Interest Rates and Capital Flows
The mechanism linking relative real interest rates to capital flows and the exchange rate.
- •If RIR in Country A > RIR in Country B → Capital flows to Country A (investors seek best returns).
- •To invest, foreigners must buy Country A's currency.
- •Demand for Country A's currency increases → Country A's currency appreciates.
6.5 - Changes in the Foreign Exchange Market and Net Exports
Key Terms & Definitions
Effect of Currency Appreciation on Net Exports
When a country's currency appreciates (gets stronger), its exports become more expensive for foreigners and imports become cheaper for its citizens.
- •Exports decrease (↓) because they're more expensive for foreigners.
- •Imports increase (↑) because they're cheaper for domestic citizens.
- •Net Exports (Xn) decrease, shifting AD to the left.
Effect of Currency Depreciation on Net Exports
When a country's currency depreciates (gets weaker), its exports become cheaper for foreigners and imports become more expensive for its citizens.
- •Exports increase (↑) because they're cheaper for foreigners.
- •Imports decrease (↓) because they're more expensive for domestic citizens.
- •Net Exports (Xn) increase, shifting AD to the right.
6.6 - Real Interest Rates and International Capital Flows
Videos
Key Terms & Definitions
Capital Inflow / Outflow
The movement of financial assets (money) into or out of a country.
- •Inflow: Foreigners buy domestic assets (e.g., Chinese investor buys US stocks).
- •Outflow: Domestic citizens buy foreign assets (e.g., US bank buys Chinese bonds).
Shifters of the FOREX Market
Factors that cause the demand for or supply of a currency to shift.
- •Changes in Tastes/Preferences (for goods)
- •Changes in relative Income
- •Changes in relative Price Level (Inflation)
- •Changes in relative Real Interest Rates
Financial Capital Flows
The movement of money (financial capital) across borders as savers seek the highest possible real interest rate on their investments.
- •Money flows *towards* the country with the higher real interest rate.
Real Interest Rates and Capital Flows
The mechanism linking relative real interest rates to capital flows and the exchange rate.
- •If RIR in Country A > RIR in Country B → Capital flows to Country A (investors seek best returns).
- •To invest, foreigners must buy Country A's currency.
- •Demand for Country A's currency increases → Country A's currency appreciates.
Checkpoint
Test your understanding of 6.4
An increase in a country's interest rates will typically:
Checkpoint
Test your understanding of 6.5
When a country's currency appreciates, its net exports typically:
