Answer to Question #157850 in Macroeconomics for Kealeboha Lebo

Question

Suppose the gold price rises in SA using a graph, explain how this rise will affect the exchange rate between SA rand and the US dollar, ceteris paribus.(10)

Answer 1

The exchange rate is decided by demand and supply of currency in foreign exchange market. Demand and supply is widely affected by foreign capital inflow and outflow. When foreign capital inflow increase currency get appreciate and vice-versa. The inflow and outflow are widely affected by net export and interest rate. When net export increase and/or then then demand for domestic currency increase and domestic currency get appreciated and vice-versa.

If gold prices rises in South Africa and all other things being unchanged or constant, it will appreciate the South African rand against the USD. Here due to increasing price of gold investors will pay more for gold that will increase demand for South African rand and demand for South African rand will shift D1 to D2 that will appreciate South African rand against the USD.