Answer to Question #112762 in Macroeconomics for December

Question

A. Based on the international trade effect, how would an increase in the price level in South Africa affect the exchange rate and aggregate demand?

1. Rand will appreciate, the quantity of aggregate demand will decrease
2. Rand will depreciate, the quantity of aggregate demand will increase
3. Exchange rate will remain unchanged, the aggregate demand will decrease
4. Exchange rate will increase, the aggregate demand will increase

Answer 1

An increase in the price level in South Africa affects the exchange rate and aggregate demand in the essense that Rand depreciates while the quantity of aggregate demand increases.(B)

From the above explanation, we understand that National currency(Rand) automatically falls in the exchange rate.

We theoretically understand that inceeasing a products value is more of output ( i.e, Rand is sold more and other National currencies come in the country (South Africa). It means that money flowing in the economy reduces , thus different stakeholders power to buy(purchasers) reduces, because of limited home currency(Rand).