I am struggling to understand the answer to this question (the answer was given as C):
If inflation in South Africa is lower than that in the United States (US), US exports are becoming relatively _____ in South African markets. This shifts the demand curve for US dollars to the _______ and the supply curve of US dollars to the ________.
A. cheaper, left, right
B. more expensive, right, left
C. cheaper, right, left
D. more expensive, left, right
E. cheaper, left, left
I selected B. Firstly, I think that if you have to pay more for US exports because of inflation, they are more expensive compared to before. Secondly, using the equation E = RER x P*/P (where E is the exchange rate, RER stands for 'real exchange rate', P* is the foreign level of prices, and P is the domestic level of prices) I think that the rand depreciates and the dollar appreciates, which implies that the demand for dollars increased (presumably because more dollars are needed to pay the higher price), and the supply of dollars decreased (presumably because traders see that they should hold on to dollars until a later date, given the appreciation caused by increased demand).