Question

Suppose that South Africa and Japan are major trading partners, and that capital flows occur between the two countries. The currency in South Africa is the South African Rand (R) and the currency in Japan is the Japanese Yen (¥). Assume that the equilibrium exchange rate in South Africa is 0.1R per ¥. Now suppose that (ceteris paribus) the cost of borrowing rises in Japan.

a. Using TWO separate graphs of the South African foreign exchange market, with each graph showing a different possible shift that could occur in that particular forex market, show how the equilibrium exchange rate might change.  Label your graphs fully and briefly explain the reason for your shifts.

a. b. Now mirror your explanation in TWO SEPARATE GRAPHS of the Japanese forex market. Label your graphs fully and briefly explain the reason for your shifts.

Answer 1

A)

We know that the cost of borrowing rises in Japan, then South African consumers keep their money in Japaneese banks offering higher interest rates So they will start purchasing more of their currency by selling more of their own. Then supply of Yen increases and then depreciates. It will shown in diagram.

In the above graph the quantity of Yen increases, then the supply curve is shifted to right. also the exchange rate decreases to E to E1 .

In the second diagram we describe that Africans keep more of their money in Japanees Banks the demand for Rand will dereases. So the demand falls and depreciates. That is,

Part B

We know that if the cost of borrowing increases in Japan then consumer will spend less, it will decrease Japanese imports and also the supply of yen in the yen-rand market also decreases. It will shown in diagram.

if the cost of borowing increases, the people live in Japan might supply less currency to earn higher interest rates in their domestic banks, Then the supply of currency decreases and appreciates. That is,