ECS3703 Assignment 2 Semester 2 2025 – DUE September 2025; 100% CORRECT AND TRUSTED SOLUTIONS

, ECS3703 Assignment 2 Semester 2 2025 – DUE September 2025; 100%
CORRECT AND TRUSTED SOLUTIONS
QUESTION 1 [15 MARKS]
Assuming that South Africa trades with China, use a fully labelled diagram to
explain what would happen to China's foreign exchange market if the Chinese
government decides to increase the tariffs imposed on South African exports to
China.

1. Background context

When two countries trade, their foreign exchange market determines how much
of one currency is exchanged for another.

 In this case:
o South Africa exports goods to China (e.g., minerals, wine, fruits).
o To pay for these goods, Chinese importers need South African rand
(ZAR).
o They demand rand by selling yuan (CNY) in the foreign exchange
market.

Thus:

 Demand for ZAR = Chinese importers buying SA goods.
 Supply of ZAR = South African importers buying Chinese goods (selling
rand for yuan).

The exchange rate between the currencies is determined where demand and supply
of rand (or yuan) intersect.



2. What happens if China increases tariffs on SA exports?

 Tariff = a tax on imports.
 When China raises tariffs on South African goods:
o South African exports to China become more expensive.
o Chinese consumers and businesses will reduce their demand for South
African goods.