Answer to Question #251589 in Macroeconomics for rah

Question

Explain, with the aid of a graph, what will happen to the rand/dollar exchange rate and the equilibrium quantity of dollars if South African exports to the United States increase.

(Hint: In your answer, also comment on the effect on the current account of the balance of payments as well as on the level of domestic prices.)

(Note: Four marks for the graph and six marks for the explanation.)

Answer 1

As South African exports to the United States rise, demand for rand rises, generating a rightward shift in demand for the rand curve, which raises the quantity demanded of rand, resulting in a current account surplus in the South African Bop. As a result, the rand will appreciate in value, leading the rand to fall in value and the rand/dollar exchange rate to plummet (dollar per rand to fall from E1 to E2) This will make South African commodities more expensive in the US and US goods less expensive in Rand terms, putting downward pressure on the domestic currency rand and increasing the price of domestic goods paid by the US, reducing US demand for South African products. As a result, the Rand's appreciation stimulates imports while discouraging exports in South Africa.