Question

1. If interest rates increase in South Africa, what will follow? Circle all of the correct responses based on the below option:

1. South Africa’s currency (the Rand) will depreciate in value
2. South Africa will import more than it exports
3. South Africa’s balance of trade position will lead to more of a surplus position
4. Countries that export products to South Africa will be pleased
5. Countries that import products from South Africa will be pleased

2. Australia suddenly experiences more of a balance of trade surplus. What can we attribute this to? Circle all of the correct responses based on the below option:

1. The Australian dollar depreciated in value
2. Interest rates increased in Australia
3. Interest rates decreased in Australia
4. The Australian dollar appreciated in value

3. BRL is the symbol for the Brazilian Real, the name of Brazil’s currency. USD/BRL 4. A Honda CTX700 motorcycle sells for $7,400 in the U.S. Is the Brazilian Real over or undervalued?

Please answer all questions, need to check my answers.

I'm very confused about this whole import & export concept and how it is affected by rising or declining interest rates. If you could please explain it to me I'd really appreciate it

Answer 1

Answer to Question (1):

An increase in interest rate will lead to an increase in savings as people will now be getting higher returns(ie. interest rate) and hence the currency of the country whose interest rate is increase will appreciate in value(as on account of higher returns there will be more foreign investment and hence more demand for the currency and hence increase in its value ).An appreciation in currency value means an increase in the value of one currency with respect to others.An appreciation in currency value in simple terms mean that more of foreign currency can be obtained by spending less of domestic currency.

Export is when a company of one country sells its products to another country and import is when a company of one country buys goods from another country.

As mentioned before; a high interest rate will lead to an appreciation of currency value(RAND in this case) and as such South African Exporters will be getting a lower return as they have sold goods in foreign currency which has declined in value as compared to South African Currency and hence they will be receiving less South African Currency.and hence they will export less.

South African Importers will import more as the foreign currency has declined in value and hence they will have to pay less south African currency to buy more foreign currency and hence the imports will become cheaper.

Since the South African imports exceed exports , therefore the balance of trade of South Africa will have a deficit in balance of trade position.

Thus, the countries importing goods from South Africa will be pleased as they are going to have to pay less.(South African Exports are other country's imports)

Similarly, countries exporting products to South Africa will not be pleased as they will receive a lower amount.

Thus the correct answer will be options (B) and (E)

Answer to Question (2):

A sudden surplus in the balance of trade can be brought about by a sudden rise in Australian Exports as compared to imports.this in turn can occur when Australian Exports become cheaper and Australian imports have become expensive.This is brought about by a depreciation(decline) in Australian Dollar, which is brought about by a decrease in Australian interest rate.

A decrease in Australian interest rate will make savings unattractive on account of lower returns and hence there will be a decline in the e foreign investments and hence a fall in the demand for Australian dollar and hence Australian Dollar will depreciate.A depreciation in Australian Dollar will lead to imports being more expensive as now more amount of Australian dollar will be required to purchase foreign currency.By using the same logic : exports will become cheaper as more foreign currencies can be obtained.

Thus choices:A and C are correct.

Answer to Question No:(3):

Purchasing Power Parity Principle states that the price of a similar good will be the same in Both USA and Brazil.So if the exchange rate is USD/Brazil 4 and the cost of Honda is $ 7400 in USA so in Brazil it is costing as: BRL: 29,600 so BRL is overvalued.