Answer to Question #251858 in Macroeconomics for Bunny

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.)

Answer 1

As South African exports to the United States increase, the demand for rand will increase causing a rightward shift in demand for the rand curve which increases the quantity demanded of rand which will lead to a surplus in the current account of South African Bop. As a result, there will be an appreciation of the rand which increase the value of the 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 the 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 the US go up which reduce US demand for South African products. Thus the appreciation of the rand encourages imports and discourages exports in South Africa.