Answer to Question #146779 in Macroeconomics for Shimona Ramjith

Question

During the 2018 December holidays, many Americans came to South Africa to visit the various tourist destinations, exchanging their dollars for Rands to purchase goods. Explain, with the aid of a graph, the impact this had on the demand and supply of dollars and the exchange rate

Answer 1

The supply of the American dollar increases on the South African foreign exchange market as the American tourists exchange their dollars into Rand. The demand of Rand increases against the US dollar. Eventually, the US dollar depreciate against the Rand. The following diagram shows the situation.

The increase in the supply of US dollars shifts the supply of US dollar from supply 1 to supply 2. As a result, the exchange value of US dollar against he Rand falls from E1 to E2, and the equilibrium quantity of US dollars exchanged increases from Q1 to Q2. Thus, the US dollar depreciates in value whereas the Rand appreciates in value.