Question

Explain with the graph the effect on the rand/dollar exchange rate and the equilibrium quantity of dollars if there is a decrease in imports from the USA to South Africa

Answer 1

The rand depreciates in value and the equilibrium quantity of dollars exchanged in the foreign exchange market decreases. Tourists are the ones who demand the rand, a decrease in the number of tourists in South Africa results to a fall in the demand of rand.

In the diagram, initially the market equilibrium is at e₁,wherethe demand and supply for the rand is intact. Due to a decrease in the number of American tourists to South Africa, the demand curve of rands falls from D₁ to D₂hence gives a new equilibrium e₂.The price of rands in terms of American dollars also falls from P₁ to P_2.Atthe same time, the quantity of rands exchanged falls from Q1 to Q₂.