Question
Assume, in the foreign exchange market, the original equilibrium exchange rate is $1,00 = R16,00 and quantity per day is $9 billion. Suppose that the South African imports from the United States increases. As a result the exchange rate is now $1,00 = R18,00. and the quantity per day is $13 billion. How can the SARB intervene.
Question 12 options:
The SARB can buy $4 billion dollars in the foreign exchange market to avoid depreciation of the rand
The SARB can buy $4 billion dollars in the foreign exchange market to avoid appreciation of the rand
The SARB can sell $4 billion dollars in the foreign exchange market to avoid depreciation of the rand
The SARB can sell $4 billion dollars in the foreign exchange market to avoid appreciation of the rand
Question 12 options:
The SARB can buy $4 billion dollars in the foreign exchange market to avoid depreciation of the rand
The SARB can buy $4 billion dollars in the foreign exchange market to avoid appreciation of the rand
The SARB can sell $4 billion dollars in the foreign exchange market to avoid depreciation of the rand
The SARB can sell $4 billion dollars in the foreign exchange market to avoid appreciation of the rand
Answers
GPT-4o mini
To analyze how the South African Reserve Bank (SARB) can intervene in the foreign exchange market in this scenario, we need to consider the implications of the currency depreciation and the changes in demand for dollars due to increased imports from the United States.
1. **Original Situation**:
- Exchange rate: $1 = R16.00
- Quantity per day: $9 billion
2. **New Situation**:
- Exchange rate: $1 = R18.00 (indicating depreciation of the rand since it takes more rands to buy a dollar)
- Quantity per day: $13 billion (indicating an increase in the volume of dollar transactions which reflects increased demand for dollars)
The depreciation of the rand implies that South African imports have increased demand for U.S. dollars, leading to a higher exchange rate. This suggests that the rand is weakening.
### Intervention Options:
- **To avoid depreciation of the rand**: The SARB should take actions that support the value of the rand.
- **What can SARB do?**:
- The SARB can buy dollars in the foreign exchange market to increase demand for the dollar while providing rands in exchange, which will help stabilize the rand and potentially prevent further depreciation.
### Conclusion:
Based on the actions that SARB would take, the correct option is:
**The SARB can buy $4 billion dollars in the foreign exchange market to avoid depreciation of the rand.**
This would stabilize the value of the rand by decreasing the supply of dollars in the exchange market, supporting the rand's value against depreciation.
1. **Original Situation**:
- Exchange rate: $1 = R16.00
- Quantity per day: $9 billion
2. **New Situation**:
- Exchange rate: $1 = R18.00 (indicating depreciation of the rand since it takes more rands to buy a dollar)
- Quantity per day: $13 billion (indicating an increase in the volume of dollar transactions which reflects increased demand for dollars)
The depreciation of the rand implies that South African imports have increased demand for U.S. dollars, leading to a higher exchange rate. This suggests that the rand is weakening.
### Intervention Options:
- **To avoid depreciation of the rand**: The SARB should take actions that support the value of the rand.
- **What can SARB do?**:
- The SARB can buy dollars in the foreign exchange market to increase demand for the dollar while providing rands in exchange, which will help stabilize the rand and potentially prevent further depreciation.
### Conclusion:
Based on the actions that SARB would take, the correct option is:
**The SARB can buy $4 billion dollars in the foreign exchange market to avoid depreciation of the rand.**
This would stabilize the value of the rand by decreasing the supply of dollars in the exchange market, supporting the rand's value against depreciation.