Answer to Question #255318 in Macroeconomics for marisa

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

Solution:

If more South Africans buy shares in American companies, there will be a large net outflow of money, causing the exchange rate to fall. This is because more rands will be sold in order to purchase Dollar shares in American companies. The increased supply of Rands on foreign exchange markets will cause Rand's value to fall.

 

This is depicted by the below graph: