Answer to Question #316855 in Microeconomics for add

Question

Use a diagram to explain what would happen to the R/$ exchange rate, ceteris paribus, if the demand for dollars increases.

Answer 1

The exchange rate is decided by demand and supply of currency in foreign exchange market. Demand and supply is widely affected by foreign capital inflow and outflow. When foreign capital inflow increase currency get appreciate and vice-versa. The inflow and outflow are widely affected by net export and interest rate. When net export increase and/or then then demand for domestic currency increase and domestic currency get appreciated and vice-versa.

If gold prices rises in South Africa and all other things being unchanged or constant, it will appreciate the South African rand against the USD. Here due to increasing price of gold investors will pay more for gold that will increase demand for South African rand and demand for South African rand will shift D1 to D2 that will appreciate South African rand against the USD.