Answer to Question #133928 in Macroeconomics for Tshwanelo

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 exchange rate will rise as the rand value depreciates. The services demanded by the tourist will decrease which will reduce the supply curve from S1 to S2. Consequently, the equilibrium quantity of dollar will reduce from Q1 to Q2