Sia
Question
Statistics
Posted 10 months ago
At the current exchange rate of the Korean won to the South African rand, South Africa is willing to supply 10 rand and Korea wants to buy 20 rand. Both countries have flexible exchange rates
Which of the following would we expect to happen?
Choose 1 answer:
(A) The supply of the rand will decrease
B The exchange rate will not change
(C) The rand will depreciate
(D) The won will depreciate
(E) The demand for the rand will decrease
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Answer from Sia
Posted 10 months ago
Solution by Steps
step 1
Consider the basic principle of supply and demand in exchange markets
step 2
If the demand for a currency exceeds its supply, the value of that currency is expected to increase
step 3
Given that Korea wants to buy 20 rand and South Africa is only willing to supply 10 rand, there is a higher demand for the rand than there is supply
step 4
With flexible exchange rates, the currency with higher demand will appreciate in value relative to the other currency
step 5
Therefore, the Korean won will depreciate relative to the South African rand due to the higher demand for the rand
Answer
D
Key Concept
Exchange Rate Determination by Supply and Demand
Explanation
When demand for a currency exceeds its supply and exchange rates are flexible, the currency in higher demand appreciates in value relative to the other currency.
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