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

Vertical axis represents rands per dollars.

$D_0$When more South Africans purchase more shares from American companies, exchange rates market for US dollars will react to higher interest rates. A higher rate of return will make holding dollars more attractive. Demand for dollars in South Africa will shift from to $D_1$ while supply for dollars will shift to the left from $S_0$ to $S_1$ . The new equilibrium $(E_1)$ has a stronger exchange rate than the original equilibrium$(E_0)$ . The equilibrium quantity traded does not change in this case.