, ECS3703 Assignment 2
Semester 2 2025
DUE September 2025
Use this document as a guide and for references to answer your assignment
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.
When the Chinese government raises tariffs on South African exports to China,
South African goods become more expensive for Chinese importers. That causes
Chinese importers to buy less from South Africa. Since imports from South Africa
are the primary reason Chinese residents demand ZAR, an increase in tariffs
reduces the demand for ZAR in China.
Setup (which market?)
Consider China’s market for South African rand (ZAR)—price on the vertical
axis is CNY per ZAR, and quantity of ZAR traded on the horizontal axis.
Demand for ZAR in China (D_CN→ZAR) comes mainly from Chinese
residents/firms who import from or invest in South Africa. They need rand to
pay SA sellers.
Supply of ZAR to China (S_ZAR→CN) comes from South Africans who
want to buy Chinese goods/assets; they trade rand for yuan.
Policy shock
China raises its tariff on imports from South Africa. For Chinese buyers, SA
goods become relatively more expensive.
Semester 2 2025
DUE September 2025
Use this document as a guide and for references to answer your assignment
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.
When the Chinese government raises tariffs on South African exports to China,
South African goods become more expensive for Chinese importers. That causes
Chinese importers to buy less from South Africa. Since imports from South Africa
are the primary reason Chinese residents demand ZAR, an increase in tariffs
reduces the demand for ZAR in China.
Setup (which market?)
Consider China’s market for South African rand (ZAR)—price on the vertical
axis is CNY per ZAR, and quantity of ZAR traded on the horizontal axis.
Demand for ZAR in China (D_CN→ZAR) comes mainly from Chinese
residents/firms who import from or invest in South Africa. They need rand to
pay SA sellers.
Supply of ZAR to China (S_ZAR→CN) comes from South Africans who
want to buy Chinese goods/assets; they trade rand for yuan.
Policy shock
China raises its tariff on imports from South Africa. For Chinese buyers, SA
goods become relatively more expensive.
