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QUESTION 1
1. 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 decides to increase tariffs on South African exports, it affects China’s
foreign exchange market, particularly the demand for South African Rand (ZAR) in China.
Impact of Increased Tariffs on China's Foreign Exchange Market:
Tariff and its Initial Impact: A tariff is a tax on imported goods. By increasing tariffs, China
makes South African goods more expensive for Chinese consumers, reducing the demand for
these imports.
Reduced Imports from South Africa: As the tariffs raise the cost of South African goods,
Chinese businesses and consumers are less likely to buy them, resulting in a decrease in
imports from South Africa.
Reduced Demand for ZAR: Since Chinese importers need to acquire South African Rand (ZAR)
to pay for these imports, the reduction in imports leads to a lower demand for ZAR in China.
Shift in the Demand Curve for ZAR: The reduction in demand for ZAR is represented by a
leftward shift of the demand curve for ZAR (D_ZAR) in China’s foreign exchange market.
Effect on the Exchange Rate: A leftward shift in the demand curve, while the supply of ZAR
remains constant, leads to a lower equilibrium exchange rate. This means fewer Chinese Yuan
(CNY) are needed to purchase one South African Rand, implying that the Chinese Yuan
appreciates against the South African Rand.
Exchange Rate Outcome: In a flexible exchange rate system, the new lower equilibrium
exchange rate results in a stronger Chinese Yuan (CNY) and a weaker South African Rand
(ZAR) (Salvatore, 2019).
Fully Labelled Diagram: China’s Foreign Exchange Market for ZAR
Diagram Description:
Vertical Axis (Y-axis): Exchange Rate (R = CNY/ZAR) – the number of Chinese Yuan (CNY)
required to buy one South African Rand (ZAR).
Horizontal Axis (X-axis): Quantity of South African Rand (Q_ZAR) – the volume of ZAR
traded in China’s foreign exchange market.
S_ZAR: The supply curve of ZAR, showing the amount of ZAR offered in exchange for CNY
(usually upward-sloping).
D_ZAR: The initial demand curve for ZAR, indicating the amount of ZAR demanded by
Chinese entities to pay for imports from South Africa.
E1: The initial equilibrium, where D_ZAR intersects S_ZAR, establishing the initial exchange
rate (R1) and quantity (Q1) of ZAR traded.
D'_ZAR: The new demand curve after the tariff increase, representing a reduced demand for
ZAR.
E2: The new equilibrium, with a lower exchange rate (R2) and a reduced quantity of ZAR
traded (Q2).
QUESTION 1
1. 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 decides to increase tariffs on South African exports, it affects China’s
foreign exchange market, particularly the demand for South African Rand (ZAR) in China.
Impact of Increased Tariffs on China's Foreign Exchange Market:
Tariff and its Initial Impact: A tariff is a tax on imported goods. By increasing tariffs, China
makes South African goods more expensive for Chinese consumers, reducing the demand for
these imports.
Reduced Imports from South Africa: As the tariffs raise the cost of South African goods,
Chinese businesses and consumers are less likely to buy them, resulting in a decrease in
imports from South Africa.
Reduced Demand for ZAR: Since Chinese importers need to acquire South African Rand (ZAR)
to pay for these imports, the reduction in imports leads to a lower demand for ZAR in China.
Shift in the Demand Curve for ZAR: The reduction in demand for ZAR is represented by a
leftward shift of the demand curve for ZAR (D_ZAR) in China’s foreign exchange market.
Effect on the Exchange Rate: A leftward shift in the demand curve, while the supply of ZAR
remains constant, leads to a lower equilibrium exchange rate. This means fewer Chinese Yuan
(CNY) are needed to purchase one South African Rand, implying that the Chinese Yuan
appreciates against the South African Rand.
Exchange Rate Outcome: In a flexible exchange rate system, the new lower equilibrium
exchange rate results in a stronger Chinese Yuan (CNY) and a weaker South African Rand
(ZAR) (Salvatore, 2019).
Fully Labelled Diagram: China’s Foreign Exchange Market for ZAR
Diagram Description:
Vertical Axis (Y-axis): Exchange Rate (R = CNY/ZAR) – the number of Chinese Yuan (CNY)
required to buy one South African Rand (ZAR).
Horizontal Axis (X-axis): Quantity of South African Rand (Q_ZAR) – the volume of ZAR
traded in China’s foreign exchange market.
S_ZAR: The supply curve of ZAR, showing the amount of ZAR offered in exchange for CNY
(usually upward-sloping).
D_ZAR: The initial demand curve for ZAR, indicating the amount of ZAR demanded by
Chinese entities to pay for imports from South Africa.
E1: The initial equilibrium, where D_ZAR intersects S_ZAR, establishing the initial exchange
rate (R1) and quantity (Q1) of ZAR traded.
D'_ZAR: The new demand curve after the tariff increase, representing a reduced demand for
ZAR.
E2: The new equilibrium, with a lower exchange rate (R2) and a reduced quantity of ZAR
traded (Q2).
