Answer to Question #251821 in Macroeconomics for Mahlodi

Question

An appreciation of the rand against the dollar

1 will worsen the current account balance but improve domestic price
2 improve the current account balance but worsen domestic price
3 improve the current account balance as well as reduce domestic price
4 worsen both balance in the current account as well as domestic price

Answer 1

Solution:

The correct answer is 1. will worsen the current account balance but improve domestic price.

 

Currency appreciation is defined as an increase in the value of one's home currency in terms of foreign currency. This will increase the price of the rand against the dollar, thus improving the domestic currency value, which means that one rand can be exchanged for more US dollars.

 

This will stimulate imports since with the same amount of money, more goods can be purchased from the US. Thus, imports are cheaper and there will be a huge increase in imports. On the other hand, exports will become expensive since foreign buyers will be able to purchase less from one unit of currency. As a result, exports are likely to decline, which will negatively affect the current account balance since it is determined by subtracting imports from exports.