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In: Economics

There is a large increase in the global demand for diamonds, of which South Africa is...

There is a large increase in the global demand for diamonds, of which South Africa is the biggest producer. At the same time, the central bank of South Africa cuts the interest rate. Explain (with appropriate diagrams) the effects of the above events on: (a) The demand for rand (South African currency) (b) The supply of rand (c) The exchange rate of the rand against the U.S. dollar

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Expert Solution

Answer - The increase in demand for diamond will lead to more supply of Rand into South Africa. This is because South Africa is the biggest producer of Diamond. Hence supply curve will shift rightward

On the other hand , when the interest rates are cut , the demand for Rand will fall because the investors will be less willing to invest in South Africa because of lower interest rates. Hence demand curve will shift leftward.

This will lead to the fall in the exchange rate between the US dollar and the south African Rand. This can be illustrated as follows -

Rahul Sunny answered 2 years ago
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