Answer to Question #133688 in Macroeconomics for ULADI SALE

Question

An increase in criminal activity in South Africa acts as a deterrent to foreign tourists
considering visiting South Africa, and as a result, there is a decline in the number of
American tourists to South Africa.
Explain, with the aid of a graph, the effect of this on the rand/dollar exchange rate
and the equilibrium quantity of dollars.

Answer 1

The decline in the number of American tourists to South Africa results in the decline of the Rand/Dollar exchange rate: the Rand currency depreciates. Also, the quantity of Dollars supplied on the market falls.

Due to a decline in tourists in South African as a result of rampant criminal activities, the demand for South African Rand declines on the foreign exchange market. Correspondingly, the quantity of dollars supplied declines as American tourists get reduced. The decline in the demand for Rand will pull down the external value of the rand currency in terms of the dollar. This is shown by the diagram below.

As shown on the graph, the initial equilibrium exchange rate is established at e1 with P1 and Q1 being the equilibrium price of rand in dollars and equilibrium quantity of rand on the market respectively. A decrease in the number of tourists to South Africa implies a decrease in the demand for the rand as shown by the downward shift of the demand for rand from the initial $D_{1}$ to $D_{2}$ resulting in a fall of the external value of the rand from P1 to P2, and a fall in the equilibrium quantity of rands exchanged from Q1 to Q2. This fall in the quantity of rands exchanged on the market implies a fall in the amount of dollars supplied as well.