Answer to Question #251743 in Macroeconomics for Mufasa

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.

Answer 1

As South African exports to the United States increase, the demand for rand will increases causing rightward shift in demand for rand curve which increase quantity demanded of rand which will leads to a surplus in current account of South African Bop. As a result, there will be appreciation of rand which increase the value of rand and causing the rand/ dollar exchange rate to fall ( dollar per rand to fall from E1 to E2). This will make South African goods expensive in United States and US's goods cheaper in terms of Rand and there will be overall downward pressure on domestic currency rand and the price of domestic good paid by US go up which reduce US demand for South African products. Thus the appreciation of rand encourage imports and discourage exports in South Africa.