Answer to Question #277502 in Microeconomics for Noxolo Tshuma

Question

explain, with the use of a graph, the impact this had on the demand and supply of dollars and the exchange rate in South Africa.

Answer 1

The value of the rand falls, and the amount of a dollar traded in the foreign market falls as well. This occurs because tourists from the United States are in strong demand for the rand in South Africa. As a result, as the number of tourists visiting South Africa declines, the demand for the rand declines, while the demand for the dollar steadily rises.

In the diagram, the market equilibrium is initially at e1, where the rand's demand and supply are intact.

The demand curve of the dollar is likely to fall from D1 to D2 because the number of tourists visiting the country from the united states of America is high. When tourists come, they exchange a dollar for a rand for use while in south Africa making the demand to fall giving rise to a new equilibrium of e2. The price of rand in terms of American dollars also falls from P1 to P2. At the same time, the number of rand exchanged falls from Q1 to Q2.

When tourists visited South Africa, the South African had to buy more dollars than rands, but now that the tourists have left, the situation has reversed, and the dollar has somewhat increased in value. As a result, domestic items are slightly cheaper than the dollar.