Answer to Question #254978 in Macroeconomics for Didi

Question

Explain, with the aid of a graph, what will happen to the exchange rate between 

the rand and the dollar if more South African residents purchase shares in 

American companies. Also comment on the impact on the equilibrium quantity

Answer 1

Solution:

If more South Africans invest in American companies, there will be a significant net outflow of funds, causing the exchange rate to fall. This is due to the fact that more rands will be sold in order to purchase dollar shares in American corporations. Because of the increased supply of rands on foreign exchange markets, the rand's value will fall.

 

The graph below depicts this:

 

 

The exchange rate equilibrium price of the rand will fall from P₁ to P₂ as the equilibrium quantity increases from Q₁ to Q₂. The equilibrium point will move from E₁ to E_2.