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ECS3703 Assignment 2 Semester 2 2024
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ECS3703 Assignment 2 Semester 2 2024 QUESTIONS WITH ANSWERS
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ECS3703 Assignment2 Semester 2 2024
QUESTIONS WITH ANSWERS
, ECS3703 Assignment 2 Semester 2 2024
Question 1
Assume that South Africa trades with the rest of the world and has a deficit in
its trade balance. With the aid of a diagram, explain how South Africa would
use exchange rates to correct the
deficit……………………………………………………….[25 marks]
To explain how South Africa can use exchange rates to correct a trade deficit,
we can analyze the situation through the lens of currency depreciation. A
trade deficit occurs when a country's imports exceed its exports. One of the
tools that can be employed to address this is the manipulation of exchange
rates. Here's a step-by-step explanation, along with a diagram to illustrate the
concept:
Explanation:
1. Understanding Trade Deficit:
o A trade deficit means that the value of goods and services South
Africa imports is greater than the value it exports. This leads to an
outflow of domestic currency (South African Rand, ZAR) as
payments are made to foreign suppliers.
2. Exchange Rate Mechanism:
o Exchange rates can be influenced by market forces or by direct
intervention by the central bank. If South Africa's currency
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