#AP Macroeconomics: Currency Fluctuations & Net Exports 🚀

Hey! Let's break down how currency values affect net exports and the overall economy. This is a crucial topic, so let's make sure you've got it down pat for the exam!

#Currency Appreciation & Its Impact

#What is Currency Appreciation?

• Currency appreciation means a country's currency becomes stronger relative to others. Think of it as your money buying more stuff in other countries.
• This can happen due to a strong economy, higher demand for the currency, or increased interest rates.

#Impact on Net Exports

• Exports become more expensive: When your currency is strong, your goods cost more for other countries to buy. This leads to a decrease in demand for your exports. 📉
• Imports become cheaper: A stronger currency means you can buy more foreign goods for less. This increases demand for imports. 🛍️
• Net Exports Decrease: Since exports fall and imports rise, net exports (Exports - Imports) decrease. 📉

#Example: Mexico and the Peso

• Tourists flock to Mexico, increasing demand for the peso. The peso appreciates.
• Mexican goods become more expensive for foreigners, decreasing exports.
• Mexicans buy more cheaper foreign goods, increasing imports.
• Net exports decrease, which in turn decreases aggregate demand. 📉

#Currency Depreciation & Its Impact

#What is Currency Depreciation?

• Currency depreciation means a country's currency becomes weaker relative to others. Your money buys less in other countries.
• This can result from a weak economy, high inflation, or decreased demand for the currency.

#Impact on Net Exports

• Exports become cheaper: When your currency is weak, your goods are a bargain for other countries. Demand for exports increases. 📈
• Imports become more expensive: A weaker currency means you pay more for foreign goods. Demand for imports decreases. 🛒
• Net Exports Increase: Since exports rise and imports fall, net exports (Exports - Imports) increase. 📈

#Example: Canada and Trade War

• Tariffs on Canadian goods decrease demand for Canadian dollars, causing depreciation.
• Canadian goods become cheaper for foreigners, increasing exports.
• Canadians buy fewer expensive foreign goods, decreasing imports.
• Net exports increase, which in turn increases aggregate demand. 📈

#Consequences of Changes in Net Exports

#Impact on Aggregate Demand (AD)

• Decrease in Net Exports (Appreciation):
  • Leads to a decrease in aggregate demand (AD). 📉
  • Results in lower output, higher unemployment, and potentially higher prices.
• Increase in Net Exports (Depreciation):
  • Leads to an increase in aggregate demand (AD). 📈
  • Results in higher output, lower unemployment, and potentially lower prices.

#How it All Connects

• Currency Appreciation → Exports ↓, Imports ↑ → Net Exports ↓ → AD ↓ → Output ↓, Unemployment ↑, Prices ↑
• Currency Depreciation → Exports ↑, Imports ↓ → Net Exports ↑ → AD ↑ → Output ↑, Unemployment ↓, Prices ↓

#Final Exam Focus 🎯

#High-Priority Topics

• Currency Appreciation and Depreciation: Understand the causes and effects of each.
• Impact on Net Exports: Know how currency changes affect exports and imports.
• Aggregate Demand: Link changes in net exports to shifts in AD.
• Economic Indicators: Explain how changes in AD affect output, employment, and prices.

#Common Question Types

• Multiple Choice: Expect questions testing your understanding of how currency fluctuations impact trade and AD.
• FRQs: Be prepared to analyze scenarios involving currency changes and their macroeconomic effects. Use graphs to illustrate your points!

#Last-Minute Tips

• Time Management: Don't spend too long on one question. Move on and come back if needed. ⏰
• Common Pitfalls:
  • Confusing appreciation and depreciation.
  • Forgetting to link net exports to aggregate demand.
  • Not using graphs to support your answers in FRQs.
• Strategies:
  • Read each question carefully and underline key terms.
  • Use diagrams to help you visualize economic relationships.
  • Write clear, concise answers that directly address the question.

#

Practice Question

Practice Questions

#Multiple Choice

1. If a country's currency appreciates, what is the likely effect on its net exports? (A) Net exports will increase. (B) Net exports will decrease. (C) Net exports will remain unchanged. (D) There is no relationship between currency appreciation and net exports.

2. Which of the following would cause a country's currency to depreciate? (A) Increased demand for the country's exports. (B) Higher interest rates in the country. (C) A trade surplus. (D) Increased inflation in the country.

3. A decrease in a country's net exports will most likely lead to: (A) An increase in aggregate demand and an increase in output. (B) A decrease in aggregate demand and a decrease in output. (C) An increase in aggregate demand and a decrease in output. (D) A decrease in aggregate demand and an increase in output.

#Free Response Question (FRQ)

Assume the United States is experiencing a trade deficit. The U.S. dollar depreciates relative to other currencies.

(a) Explain how the depreciation of the U.S. dollar will affect U.S. exports and imports. (2 points) (b) How will the change in exports and imports affect U.S. net exports? (1 point) (c) Using an aggregate demand (AD) and aggregate supply (AS) graph, show the impact of the change in net exports on the U.S. economy. (3 points) (d) What will be the impact of the change in net exports on the U.S. price level and output? (2 points)

#FRQ Scoring Breakdown

(a) (2 points)

• 1 point: Exports will increase because U.S. goods become cheaper for foreign buyers.
• 1 point: Imports will decrease because foreign goods become more expensive for U.S. buyers.

(b) (1 point)

• 1 point: Net exports will increase because exports increase and imports decrease.

(c) (3 points)

• 1 point: Correctly labeled axes (Price Level on the vertical axis and Real GDP on the horizontal axis).
• 1 point: Initial AD and AS curves.
• 1 point: A rightward shift of the AD curve.

(d) (2 points)

• 1 point: The price level will increase.
• 1 point: Output (real GDP) will increase.