Answer to Question #255198 in Macroeconomics for Bob

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 of dollars

Answer 1

There will be a substantial net outflow of money if more South Africans buy shares in American companies, leading the exchange rate to decline. This is because more rands will be sold in order to buy American company shares in dollars. The value of the Rand will decline due to the increasing availability of Rands on foreign currency markets.

The graph below illustrates this: