Practice a College Board-style free response question on Open Economy: International Trade and Finance. Write your response, then reveal the model answer to see exactly what earns each point.
Free Response Question · Unit 6 · The Foreign Exchange Market & Net Exports
The country of Brindale currently has a floating exchange rate against the currency of its largest trading partner, Solmark. Suppose Brindale's central bank raises its policy interest rate, while real GDP and the price level in Solmark remain unchanged.
A
Using a foreign exchange market graph for Brindale's currency, explain the most likely effect of this interest rate increase on the demand for Brindale's currency and on its exchange rate.
✓ Model answer (earns the point)
A higher interest rate in Brindale makes Brindale's financial assets more attractive to foreign investors seeking better returns, increasing capital inflows. To purchase those assets, foreign investors must first buy Brindale's currency, which increases demand for it. On the foreign exchange market graph, the demand curve for Brindale's currency shifts right, and at the new equilibrium, Brindale's currency appreciates (the exchange rate rises).
Why it scores: Correctly identifies the mechanism (higher rates → capital inflows → currency demand), states the correct shift (demand right), and the correct outcome (appreciation). Just saying "the currency appreciates" without the capital-flows mechanism would earn only partial credit.
B
Explain the most likely effect of Brindale's currency appreciation on its net exports.
✓ Model answer (earns the point)
Brindale's net exports will most likely decrease. As Brindale's currency appreciates, Brindale's exports become more expensive for Solmark's buyers (reducing export demand), while Solmark's goods become cheaper for Brindale's buyers (increasing import demand). Both effects reduce net exports (exports minus imports).
Why it scores: States the correct direction (net exports decrease) and explains both sides of the mechanism — exports becoming pricier abroad AND imports becoming cheaper at home. A response that mentions only one side would earn partial credit.
C
Using an aggregate demand and aggregate supply (AD/AS) graph, explain how the change in net exports from Part B would affect Brindale's short-run equilibrium output and price level.
✓ Model answer (earns the point)
Net exports (Xn) are a component of aggregate demand (AD = C + I + G + Xn). Since net exports decrease, aggregate demand shifts left. On the AD/AS graph, the new short-run equilibrium occurs at the intersection of the new (leftward) AD curve and the unchanged SRAS curve, resulting in a lower real GDP (output) and a lower price level compared to the original equilibrium.
Why it scores: Correctly identifies net exports as an AD component, states the correct shift direction (AD left), and correctly predicts both outcomes (lower output AND lower price level). Missing either outcome, or stating the wrong direction, would lose points.
How to score points on AP Macroeconomics FRQs
Trace the full causal chain. Unit 6 FRQs often connect interest rates → capital flows → currency demand → exchange rate → net exports → AD → output/price level. Skipping a link costs points.
State both sides of an exchange rate effect on trade. Appreciation affects exports AND imports — name both, not just one.
Reference net exports as an explicit AD component. Write out AD = C + I + G + Xn when relevant — it shows you understand exactly how the open economy connects to the AD/AS model.
Answer the verb in the prompt. "Explain" requires the mechanism, not just the conclusion.
Be precise about direction. Appreciation vs. depreciation, increase vs. decrease — AP graders specifically check directional accuracy at each step.