Question

Currency devaluation done by the government leads to which of the following?

• A. Fall in domestic prices
• B. Increase in domestic prices
• C. No impact on domestic prices
• D. Irregular fluctuations in domestic prices

Answer 1

The correct option is C No impact on domestic prices

The government that issues the currency decided to devalue any currency. Devaluation of a currency is, in turn, the downward adjustment for a country's currency value. When the currency is devalued, the cost of the country's exports can be reduced. Furthermore, it can also help in shrinking trade deficits. Currency devaluation may lower productivity, since imports of capital equipment and machinery may become too expensive. Devaluation also significantly reduces the overseas purchasing power of a nation's citizens. A devaluation in the exchange rate lowers the value of the domestic currency in relation to all other countries, most significantly with its major trading partners. ... However, the devaluation increases the prices of imported goods in the domestic economy, thereby fueling inflation