Answer to Question #198497 in Macroeconomics for Diana

Question

1. Use a demand and supply diagrams of a rand in terms of dollar to illustrate the following (20)

 

i.                   The decrease in supply for a rand (10)

ii.                 An increase in supply for a rand (10)

 

Hint: Put price of exchange rates on the vertical axis and quantity (millions) of a rand per day on the horizontal axis

Answer 1

i.

When the supply of rand decreases, the supply curve of rand shifted leftward from SS to SS'. This will shift the equilibrium from E1 to E2. 

As a result, the equilibrium exchange rate will increase from e to e' and the equilibrium quantity of rand will decrease from Q to Q'.

ii.

When the supply increases it shifts rightward from SS to SS'. The equilibrium shifts from E1 to E2. 

As a result, the equilibrium exchange rate will decrease from e to e' and the equilibrium quantity of rand will increase from Q to Q'.