Answer to Question #230259 in Macroeconomics for Sue

Question

Question 1 (15 marks)

There was a discovery of the new species of Homo Naledi in South Africa in the year 2017. This resulted in an increase in international tourists visiting South Africa. 1.1 Use a foreign exchange diagram to illustrate and explain the effect of this discovery on the rand–dollar exchange rate, ceteris paribus. (10)

1.2 Explain how your result in Question 1.1 could have affected import prices and inflation in South Africa. (5)

Answer 1

When the number of tourists visiting South Africa rises, the value of the currency exchange rate rises as well. Because of the increased demand, the rand-dollar exchange rate will rise. If gold prices rise in South Africa, and all other factors remain the same or remain steady, the South African rand will appreciate against the US dollar. Tourists will have to pay more based on the demand increase for the rand as the demand for rand shifts to D2 from D1 which will appreciate the rand against Dollar.

1.2)Import prices will be reduced as a result of the open market in South Africa that will be created as a result of higher wealth. The rate of inflation will also fall. Import prices will be reduced as a result of the open market in South Africa that will be created as a result of higher wealth. The rate of inflation will also fall.