Question

Consider the following statements:

1. Devaluation of currency is done by RBI while depreciation is linked to market demand and supply
2. Depreciation refers to reduction in the purchasing capacity of the currency

Which of the following is/are correct ?

• A.
  1 only
• B.
  2 only
• C.
  Both 1 and 2
• D.
  None of the above

Answer 1

The correct option is C

Both 1 and 2
Both devaluation and depreciation lead to the decline in the value of domestic currency. However, there are certain differences between them.

Devaluation is the official reduction in the value of a currency, while depreciation refers to an decline in the currency’s value due to market forces. Devaluation of the currency is done purposely by the central bank or the government. Whereas the market forces of demand and supply are responsible for the depreciation of a currency.

The impact of currency devaluation is for short term, while the depreciation of currency can affect the economy for a longer time.

Devaluation of currency is done occasionally by the central bank, whereas depreciation and appreciation of currency occur on a daily basis.