Q. Consider the following statements with respect to devaluation of a currency:
Select the correct answer using the codes given below:
Q. Consider the following statements with respect to devaluation of a currency:
Select the correct answer using the codes given below:
The correct option is C 2 and 3 only
Explanation:
Statement 1 is incorrect: Under a fixed exchange rate system, devaluation and revaluation are official changes in the value of a country's currency relative to other currencies. In a fixed exchange rate system, both devaluation and revaluation can be conducted by policymakers, usually motivated by market pressures.
Statement 2 is correct: A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies and makes the exports competitive in the international market. There are two implications of a devaluation. First, devaluation makes the country's exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country's exports and decrease imports, and may therefore help to reduce the current account deficit.
Statement 3 is correct: By increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation.
Explanation:
Statement 1 is incorrect: Under a fixed exchange rate system, devaluation and revaluation are official changes in the value of a country's currency relative to other currencies. In a fixed exchange rate system, both devaluation and revaluation can be conducted by policymakers, usually motivated by market pressures.
Statement 2 is correct: A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies and makes the exports competitive in the international market. There are two implications of a devaluation. First, devaluation makes the country's exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country's exports and decrease imports, and may therefore help to reduce the current account deficit.
Statement 3 is correct: By increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation.
