Question

Select the correct statement(s) when a currency goes for ‘devaluation’ – using the code given below:
1. Fall in the value of currency in relation to international currencies.
2. Exports become less competitive.
3. Trading partners see fall in their exports.
Code:

• A. Only 1 and 2
• B. Only 2 and 3
• C. Only 1 and 3
• D. All of the above

Answer 1

The correct option is C Only 1 and 3

Explanation: Devaluation means decreasing the value of nation’s currency relative to gold or the currencies of other nations.
Devaluation occurs in terms of all other currencies, but it is best illustrated in the case of only one other currency. Devaluation and Depreciation are sometimes used interchangeably, but they always refer to values in terms of other currencies and the value of currency is determined by the interplay of money supply and money demand. In common modern usage, it specifically

implies an official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign currency. In contrast, (currency) depreciation is most often used for the unofficial decrease in the exchange rate in a floating exchange rate system.

Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments.
Possible impacts of the devaluation on the economy could be the stimulation of merchandise exports, discouraging merchandise imports and thus improving terms of trade, increase revenue collection and savings in repatriation of profits and royalties by existing foreign investors, bringing illegal foreign exchange leakages into official channels and putting an end to gold smuggling. Inflow of foreign capital can be improved by devaluation only if prices do not rise.