Answer to Question #146782 in Macroeconomics for .

Question

Explain, with the aid of a 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.
In your answer comment on the effect of this on the current account balance as well as on domestic prices.
(Note: 5 marks for the graph and 5 marks for the explanation of the graph)

Answer 1

The value of rand goes down, and the equilibrium quantity of a dollar exchanged in the foreign market decreases also. This happens because the demand for the rand is high by the United states tourists in South Africa. Consequently, When the tourist's number in South Africa start reducing, the demand for the rand in South Africa drops and a steady increase in the demand for a dollar is noticed.

In the diagram, the market equilibrium is initially at e1, where the rand's demand and supply are intact.

The demand curve of the dollar is likely to fall from D1 to D2 because the number of tourists visiting the country from the united states of America is high. When tourists come, they exchange a dollar for a rand for use while in south Africa making the demand to fall giving rise to a new equilibrium of e2. The price of rand in terms of American dollars also falls from P1 to P2. At the same time, the number of rand exchanged falls from Q1 to Q2.

The South African needed to buy more dollar than the rand when tourists visitors came to South Africa, but now that the tourists are leaving, that reverse happens and the dollar slightly increases in value. This leads to the prices of domestic goods a bit cheaper than the dollar.