Answer to Question #175148 in Macroeconomics for Metsi

Question

Use a foreign exchange diagram to illustrate and explain the effect of the decline in demand on the rand–dollar exchange rate, ceteris paribus.

Answer 1

The decline in demand on the rand–dollar exchange rate, ceteris paribus ,makes the value of one currency to depreciate .In the diagram, initially the market equilibrium is at e₁,wherethe demand and supply for the rand is intact. 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.