Answer to Question #311101 in Macroeconomics for dodo

Question

use a foreign exchange diagram to illustrate and explain the effect of the increase in commodity prices on the rand-dollar exchange rate, ceteris paribus.

Answer 1

If price of commodities are increasing leading to high inflation, then buying power is decreasing and international investors will be less eager to hold it the dollar. Thus, a rise in inflation in the rand would lead demand to shift from D0 to D1, and supply to increase from S0 to S1. Both movements in demand and supply would cause the currency to depreciate. The effect on the quantity traded is drawn here as a decrease, but it could be an increase or no change, depending on the actual movements of demand and supply. See graph below: