AP® Macroeconomics · Free response

Higher inflation abroad: the market for the arl, appreciation and net exports

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Short free-response question · four-function calculator · 5 points · about 12 minutes

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The question

Name: ______________________   Date: ____________   Higher inflation abroad: the market for the arl, appreciation and net exports (5 points)

Arland and Belvia are invented countries that trade with each other. Arland's currency is the arl and Belvia's is the bel. Belvia's inflation rate rises sharply while Arland's does not change.

  1. (A) Draw a correctly labeled graph of the foreign exchange market for the arl and show the effect of the change in Belvia's inflation rate on the international value of the arl. [3 points]

  2. (B) Identify what happens to the international value of the bel relative to the arl. [1 point]

  3. (C) Considering only the change in the value of the arl in part (A), will Arland's net exports increase, decrease or stay the same? Explain. [1 point]