SAT / PSAT
SAT / PSAT Prep
History & Social Science
AP World History AP US History AP European History AP Human Geography AP US Government & Politics AP Psychology AP Macroeconomics AP Microeconomics
English
AP English Language & Composition AP English Literature & Composition
Math & Computer Science
AP Calculus AB/BC AP Precalculus AP Statistics AP Computer Science A AP Computer Science Principles
Sciences
AP Biology AP Chemistry AP Environmental Science AP Physics 1 AP Physics 2
World Languages & Arts
AP Spanish Language AP Art History AP Music Theory Start studying →
Unit 6 · Open Economy: International Trade & Finance Unit Hub Flashcards Cheat Sheet Essentials Visual Review MC Practice FRQ Practice

AP Macroeconomics Unit 6 Visual Review

An 8-slide visual review of Open Economy: International Trade and Finance — the foreign exchange market, exchange rate shifts, and net export effects, built right into the page.

← Back to Unit 6 hub
UNIT 6 · SLIDE 1 The Balance of Payments Current account (CA) flows of goods, services & income • Net exports of goods & services (the big piece) • Net investment income (interest, dividends) • Net transfers (foreign aid, remittances) U.S. runs a persistent CA DEFICIT (imports > exports) Capital & financial account (CFA) flows of ASSETS across borders • Purchases of stocks, bonds & real estate • Foreign direct investment (factories, firms) • Official reserves U.S. runs a CFA SURPLUS — foreigners buy U.S. assets The identity: CA + CFA = 0 With flexible exchange rates the two accounts mirror each other — a current account deficit is ALWAYS matched by a capital/financial account surplus of the same size. Dollars foreigners earn selling us imports come back as purchases of U.S. assets. Every dollar that leaves through trade comes back through asset purchases — the accounts must balance. The Review Hub · AP Macroeconomics Unit 6
The current account tracks goods, services, and income; the capital/financial account tracks asset flows. They mirror each other: CA + CFA = 0 under flexible exchange rates.
UNIT 6 · SLIDE 2 The Foreign Exchange (Forex) Market e₁ D$ S$ Price of $ (in € per $) Quantity of dollars Who DEMANDS dollars? Foreigners — they need $ to buy U.S. exports and U.S. financial assets (stocks, bonds). Downward: a cheaper dollar makes U.S. goods a bargain Who SUPPLIES dollars? Americans — they trade $ away to buy imports and foreign assets. Upward: a stronger dollar makes imports cheaper for us The equilibrium price of a currency = the exchange rate. In the market FOR dollars: foreigners demand, Americans supply — label axes with both currencies. The Review Hub · AP Macroeconomics Unit 6
A currency's price is set like any other: foreigners demand dollars (to buy U.S. goods and assets); Americans supply them (to buy foreign goods and assets). The intersection is the exchange rate.
UNIT 6 · SLIDE 3 Appreciation, Depreciation & the Shifters Appreciation Currency BUYS MORE foreign currency D for $ shifts right, or S of $ shifts left Depreciation Currency BUYS LESS foreign currency D for $ shifts left, or S of $ shifts right What shifts demand for a currency (the five determinants) 1. Tastes — foreigners want more American goods → demand for $ rises → appreciation 2. Relative incomes — foreign incomes rise → they buy more U.S. exports → $ appreciates 3. Relative price levels — U.S. inflation higher → U.S. goods pricier → $ depreciates 4. Relative REAL interest rates — higher U.S. rates → capital inflow → $ appreciates (Slide 5) 5. Speculation — expected appreciation attracts buyers today Every shifter works through the same logic: more demand for the currency → it appreciates. Anything that makes people want more dollars — goods or assets — appreciates the dollar. The Review Hub · AP Macroeconomics Unit 6
Appreciation = your currency buys more; depreciation = it buys less. Five shifters: tastes, relative incomes, relative price levels, relative real interest rates, and speculation.
UNIT 6 · SLIDE 4 Exchange Rates → Net Exports Dollar APPRECIATES U.S. goods look EXPENSIVE abroad ↓ Exports ↓ · Imports ↑ (they're cheap now) ↓ Net exports FALL → AD shifts LEFT "Strong dollar, weak net exports" Dollar DEPRECIATES U.S. goods look CHEAP abroad ↓ Exports ↑ · Imports ↓ (they're pricey now) ↓ Net exports RISE → AD shifts RIGHT "Weak dollar, strong net exports" The exchange rate is the bridge from the forex market to AD via net exports. The Review Hub · AP Macroeconomics Unit 6
Appreciation makes exports pricey and imports cheap → net exports fall → AD left. Depreciation does the opposite. This chain connects Unit 6 back to the AD/AS model.
UNIT 6 · SLIDE 5 Interest Rates & Capital Flows D$₁ D$₂ S$ e₂ e₁ Price of $ Quantity of dollars The chain (shown left) U.S. REAL interest rates rise relative to other countries → U.S. bonds pay better → foreign investors need dollars → D$ shifts right → the dollar APPRECIATES (e₁ → e₂). Financial capital chases the highest real return. And the reverse U.S. rates FALL relative to abroad → capital flows OUT → less demand for $ (and more supply, as Americans buy foreign assets) → depreciation. Rate differentials are the exam's favorite forex shifter. Higher relative real rates → capital inflow → appreciation. Lower rates → outflow → depreciation. The Review Hub · AP Macroeconomics Unit 6
Financial capital chases the best real return. Higher relative U.S. rates draw inflows that appreciate the dollar; lower rates push capital out and depreciate it.
UNIT 6 · SLIDE 6 How Policy Moves the Exchange Rate Expansionary MONETARY policy Rates fall → capital outflow → $ DEPRECIATES → Xn rises → AD gets an EXTRA push right The forex effect REINFORCES the stimulus Contractionary MONETARY policy Rates rise → capital inflow → $ APPRECIATES → Xn falls → AD gets an extra pull left Again the forex effect reinforces the policy Expansionary FISCAL policy Deficit borrowing → real rates RISE → capital inflow → $ APPRECIATES → Xn falls The forex effect partially OFFSETS the stimulus — international crowding out via net exports The pattern to memorize MONETARY policy: forex effect works WITH you FISCAL policy: forex effect works AGAINST you Because they push interest rates in opposite directions for the same AD goal Trace every step: policy → interest rate → capital flow → currency → net exports → AD Monetary policy's forex effect reinforces it; fiscal policy's forex effect offsets it. The Review Hub · AP Macroeconomics Unit 6
Easy money lowers rates, depreciates the currency, and boosts net exports — reinforcing itself. Fiscal stimulus raises rates, appreciates the currency, and dents net exports — offsetting itself.
UNIT 6 · SLIDE 7 The Full FRQ Chain — Money to Forex to AD Example: the Fed buys bonds (expansionary monetary policy) 1 · Money supply shifts RIGHT → nominal interest rate FALLS ↓ 2 · Domestic effect: cheaper borrowing → Investment & Consumption RISE ↓ 3 · Forex effect: lower rates → capital outflow → dollar DEPRECIATES ↓ 4 · Cheaper dollar → exports ↑, imports ↓ → NET EXPORTS RISE ↓ 5 · I↑ + C↑ + Xn↑ → AD shifts RIGHT → real GDP ↑, price level ↑ This 5-step chain strings together Units 4, 6, and 3 — the capstone macro FRQ. The Review Hub · AP Macroeconomics Unit 6
The capstone chain: money market → interest rate → both the domestic (I, C) and international (forex → Xn) channels → AD. Multi-part FRQs walk this exact path.
UNIT 6 · SLIDE 8 Unit 6 Quick Reference — Know These Cold Balance of payments CA: goods, services, income, transfers CFA: asset purchases across borders CA + CFA = 0 — they mirror each other CA deficit ⇔ CFA surplus (the U.S. case) Forex market rules Foreigners DEMAND the dollar; Americans SUPPLY it More demand → appreciation; more supply → depreciation Shifters: tastes, incomes, price levels, real rates One country's D curve is the other's S curve Exchange rate effects Appreciation → exports↓ imports↑ → Xn↓ → AD← Depreciation → exports↑ imports↓ → Xn↑ → AD→ Higher relative real rates → inflow → appreciation Strong currency, weak net exports Policy → forex cheat sheet Easy money → depreciation → reinforces stimulus Tight money → appreciation → reinforces cooling Fiscal stimulus → appreciation → offsets itself Monetary reinforces; fiscal offsets Unit 6 is 10–13% of the exam — a labeled forex graph with a correct shift earns fast FRQ points. The Review Hub · AP Macroeconomics Unit 6
BOP identity, forex mechanics, exchange-rate effects on net exports, and the policy cheat sheet. Practice drawing the dollar market with a correctly labeled shift — it's reliable FRQ credit.
1 / 8

How to use the visual review

Spend 30 seconds per step before clicking next. Look at the diagram, then ask yourself: "Could I sketch this from memory and label every part?"

Use the dots below the diagram to jump straight to any step, or the arrow keys to move forward and back.

This is great for review the night before the exam — fast, visual, and covers every core diagram you need to remember from Unit 6.