Answer to Question #236117 in Macroeconomics for thando

Question

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

Answer 1

Solution:

The increase in international tourists visiting South Africa will lead to an increase in the demand for rands since the tourists visiting South Africa need to exchange their currencies with the South African rands. Therefore, the international tourists will be the demanders of the rand.

As such, the rand will appreciate in value and the equilibrium quantity of currencies exchanged in the foreign exchange market increases.

 

This is depicted by the below foreign exchange market graph:

 

 

Initially, the market equilibrium is set at E, where the initial demand curve D intersects the supply curve (S). Due to an increase in international tourists to South Africa, the demand curve of rands increases from D to D₁, establishing a new equilibrium point E₁. The price of rand relative to other foreign currencies increases from P to P₁ and the quantity of rands demanded also increases from Q to Q₁. This means that the quantity of other currencies traded on the foreign exchange market increases.