Answer to Question #134386 in Macroeconomics for Tlhogi

Question

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

$$Solution$$

Figure-1 in the document attached below illustrates the impact of an increase in the criminal activities in South Africa and the ensuing reduction in the influx of tourists into the country on its foreign exchange market. The $y$ and the $x$ axes in figure-1 represent the price of Rand in terms of US Dollars or P(R) and the quantity of rand or Q(R) respectively.

The D(R)1 and the S(R)1 denote the initial demand curve and supply curve of Rand in the foreign exchange market of Rand. The initial equilibrium exchange rate and the quantity of Rand in the market are indicated or denoted as P(R)1 and Q(R)1 respectively corresponding to the intersection of D(R)1 and S(R)1 curves.

Now, as criminal activities increase in South Africa, the foreign tourists would be apprehensive about travelling to South Africa leading to a reduction in the overall tourist activities in the country. This would expectedly reduce the demand for Rand among the foreign residents or tourists thereby leading to a decrease in the overall demand for Rand in the foreign exchange market.

As a result, the market demand for Rand would decrease as indicated in figure-1 by a leftward or downward shift of the market demand curve for Rand from its initial position D(R)1 to D(R)2 leading to new equilibrium exchange rate and quantity of Rand which are denoted as P(R)2 and Q(R)2 respectively corresponding to the intersection of D(R)2 and S(R)1 curves in figure-1. Note that as the demand for Rand decreases in the market the exchange rate value of Rand in terms of US Dollars depreciates or declines from the initial value of P(R)1 to P(R)2 and the equilibrium quantity of Rand also decreases from Q(R)1 to Q(R)2.