2024 AP AP Macroeconomics Practice Paper with Answers

(a)
(i) The graph must show a downward-sloping aggregate demand (AD) curve and an upward-sloping short-run aggregate supply (SRAS) curve intersecting to determine the short-run equilibrium output \(Y_1\) on the horizontal axis and price level \(\text{PL}_1\) on the vertical axis.
(ii) The long-run aggregate supply (LRAS) curve is a vertical line located to the left of \(Y_1\) (since actual unemployment of 3% is below the natural rate of 5%, indicating an inflationary gap), labeled \(Y_F\).

(b)
(i) The government spending multiplier is:
\[ \text{Multiplier} = \frac{1}{\text{MPS}} = \frac{1}{0.2} = 5 \]
\[ \Delta \text{AD} = \Delta G \times \text{Multiplier} = -\$40\text{ billion} \times 5 = -\$200\text{ billion} \]
The maximum change in aggregate demand is a decrease of $200 billion (or \(-\$200\text{ billion}\)).
(ii) On the graph in part (a), the AD curve shifts to the left (labeled \(\text{AD}_2\)), resulting in a lower equilibrium price level \(\text{PL}_2\) and a lower equilibrium real output \(Y_2\).

(c) In the long run without government intervention, the low unemployment rate creates a shortage of labor, putting upward pressure on nominal wages and other input prices (as well as inflationary expectations). As production costs rise, the short-run aggregate supply (SRAS) curve shifts to the left until output returns to the full-employment level \(Y_F\) at a higher price level.

(d) In an ample-reserves regime, the central bank would increase its administered interest rates (specifically, increase the interest rate on reserve balances / interest on reserves).

(e) The reserve market graph shows the policy rate on the vertical axis and the quantity of reserves on the horizontal axis. The demand curve for reserves is downward-sloping at low rates and becomes horizontal at the administered rate (interest on reserves). The supply curve of reserves is vertical and intersects the demand curve on its horizontal segment (the ample-reserves region). An increase in the administered rate shifts the horizontal portion of the demand curve upward, resulting in an increase in the equilibrium policy rate from \(\text{PR}_1\) to \(\text{PR}_2\).

(f)
(i) The price of previously issued bonds will decrease (due to the inverse relationship between interest rates and bond prices).
(ii) Real GDP will decrease. An increase in the policy rate raises short-term nominal and real interest rates, increasing borrowing costs. This decreases interest-sensitive private spending (consumption and gross investment), shifting the aggregate demand curve leftward and lowering equilibrium real output (real GDP).

Part (a): 2 points
- 1 point for drawing a correctly labeled aggregate demand–aggregate supply graph showing \(\text{PL}_1\) and \(Y_1\) at the intersection of AD and SRAS.
- 1 point for showing a vertical long-run aggregate supply (LRAS) curve positioned to the left of \(Y_1\) and labeled \(Y_F\).

Part (b): 2 points
- 1 point for correctly calculating the maximum change in aggregate demand as \(-\$200\text{ billion}\) (or a decrease of $200 billion) and showing valid work: \(\text{Multiplier} = 1/0.2 = 5\) and \(\Delta \text{AD} = -40 \times 5 = -200\).
- 1 point for showing a leftward shift of the AD curve on the graph from part (a), resulting in a decrease in the price level to \(\text{PL}_2\) and a decrease in real output to \(Y_2\).

Part (c): 1 point
- 1 point for explaining that nominal wages (or input prices / inflationary expectations) will increase, causing the SRAS curve to shift left / decrease until real output returns to full employment.

Part (d): 1 point
- 1 point for stating that the central bank would increase its administered interest rates (or increase the interest on reserves / IORB rate).

Part (e): 2 points
- 1 point for drawing a correctly labeled graph of the reserve market showing a vertical supply curve intersecting the flat/horizontal region of the demand for reserves curve.
- 1 point for showing an upward shift of the administered rate (or horizontal portion of the reserve demand curve), leading to a higher policy rate.

Part (f): 2 points
- 1 point for stating that the price of previously issued bonds will decrease.
- 1 point for stating that real GDP will decrease AND explaining that the increase in interest rates reduces interest-sensitive spending (consumption or investment), causing aggregate demand to decrease.

(a) Cost of the basket in Year 2:
$$\text{Cost} = (50 \times \$3) + (20 \times \$6) = \$150 + \$120 = \$270$$

(b) First, compute the cost of the basket in the base year (Year 1):
$$\text{Cost}_{\text{Year 1}} = (50 \times \$2) + (20 \times \$5) = \$100 + \$100 = \$200$$
Then calculate the CPI for Year 2:
$$\text{CPI}_{\text{Year 2}} = \left( \frac{\text{Cost of Basket in Year 2}}{\text{Cost of Basket in Base Year}} \right) \times 100 = \left( \frac{\$270}{\$200} \right) \times 100 = 135$$

(c) The inflation rate is the percentage change in the CPI from the base year value of 100 to 135:
$$\text{Inflation Rate} = \left( \frac{135 - 100}{100} \right) \times 100 = 35\%$$

(d) The worker's real wage decreased because the nominal wage grew by 8%, which is less than the inflation rate of 35% (approximate change in real wage = $8\% - 35\% = -27\%$).

(e) Commercial lenders are better off because the actual inflation rate of 35% was lower than the expected inflation rate of 40%, which means lenders received a higher real return (real interest rate) on their fixed-rate loans than anticipated.

(a) 1 point for calculating the cost of the market basket in Year 2 as $270 and showing correct work: $(50 \times 3) + (20 \times 6) = $270$.

(b) 1 point for calculating the CPI in Year 2 as 135 and showing correct work: $($270 / $200) \times 100 = 135$.

(c) 1 point for stating that the inflation rate is 35%.

(d) 1 point for stating that the real wage decreased AND explaining that the nominal wage increased by less than the inflation rate ($8\% < 35\%$).

(e) 1 point for stating that lenders are better off AND explaining that the actual inflation rate was less than expected ($35\% < 40\%$), meaning the real interest rate earned was higher than expected.

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).

(a) Higher relative real interest rates in Arcadia offer a higher rate of return on Arcadian financial assets, which will cause financial capital inflows into Arcadia to increase.

(b) A correctly labeled foreign exchange graph for the arc must have:
- Vertical axis: Price of ARC in terms of RUP (e.g., RUP/ARC or Exchange Rate)
- Horizontal axis: Quantity of ARC
- Downward-sloping demand curve for ARC (\(D_{\text{ARC}}\)) and upward-sloping supply curve of ARC (\(S_{\text{ARC}}\))
- An outward/rightward shift in the demand curve for the arc (\(D_{\text{ARC1}}\) to \(D_{\text{ARC2}}\)) (and/or a leftward shift in the supply curve of ARC), leading to an increase in the equilibrium exchange rate from \(e_1\) to \(e_2\) (appreciation of the ARC).

(c) Arcadia's net exports will decrease. Because the currency appreciated, domestic goods become relatively more expensive to foreign buyers (decreasing exports) and foreign goods become relatively less expensive to domestic buyers (increasing imports), leading to a reduction in net exports (\(NX = X - M\)).

(d) Arcadia's current account (CA) will move into deficit (or decrease/become negative) as a result of the decrease in net exports.

Total: 5 points

(a) 1 point:
- Stating that financial capital inflows into Arcadia will increase (or capital will flow into Arcadia).

(b) 2 points:
- 1 point: Drawing a correctly labeled graph of the foreign exchange market for the arc (ARC) with axes correctly labeled (Exchange rate as RUP/ARC or Price of ARC in RUP; Quantity of ARC) and downward-sloping Demand and upward-sloping Supply curves.
- 1 point: Showing a rightward shift of the demand curve for ARC (or a leftward shift of the supply curve of ARC), resulting in an increase in the equilibrium exchange rate / appreciation of the ARC.

(c) 1 point:
- Stating that net exports will decrease AND explaining that the appreciation of the arc makes Arcadian goods relatively more expensive for foreigners and/or foreign goods relatively cheaper for Arcadian consumers.

(d) 1 point:
- Stating that Arcadia's current account (CA) balance will move into deficit (or decrease/worsen).