Question

Suppose that the price of Brent Crude oil, which is a South African import, falls and is denominated in US Dollars. What is the impact of the price decrease on the foreign exchange market?

a. The supply of Dollars will increase and the Rand will appreciate.
b. The supply of Dollars will decrease and the Rand will depreciate.
c. The demand for Dollars will decrease and the Rand will appreciate.
d. The demand for Dollars will

Answer 1

The decrease in Brent Crude oil prices leads to a decrease in demand for US Dollars, as South Africa requires fewer dollars to buy the same amount of oil, potentially causing the South African Rand to appreciate.

Step-by-step explanation:

When the price of Brent Crude oil falls, and it's denominated in US Dollars, the demand for dollars to purchase this cheaper oil decreases. As a result, there is a reduction in the demand for US Dollars on the foreign exchange market. South African importers, benefiting from lower oil prices, will require fewer dollars to purchase the same quantity of oil.

The correct impact on the foreign exchange market is option c: "The demand for Dollars will decrease, and the Rand will appreciate." With reduced spending in US Dollars on imports, the demand for US Dollars decreases, potentially leading to a relative appreciation of the South African Rand. This scenario reflects the interconnectedness of currency values and commodity prices, demonstrating the impact of changes in global markets on exchange rates.