Answer to Question #255213 in Macroeconomics for khanyi

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

Answer 1

The exchange rate is USD per Rand. Now, when the US buys anything from South Africa, it converts USD to Rand to pay South Africa. In other words, Rands are needed. As South African exports to US increase, it means more Rand are needed. As the quantity demanded fo Rands increases, it increases their value. This means Rands value, as compared to USD, increases. Hence, Rand appreciates. This is shown below

The new exchange rate E1 is higher than E, meaning that there are more USD one can get per Rand now. This means USD has depreciated while Rand has appreciated.