2
Question
The term _________ means to increase the value of domestic currency compared to foreign currency.
The term _________ means to increase the value of domestic currency compared to foreign currency.
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Solution
The correct option is B overvaluation
When
the value of domestic currency increases as compared to foreign currency, it
is termed as overvaluation. It implies that a country's currency is too high
for the state of the economy. It means that the country’s exports will be
relatively expensive and imports cheaper. It tends to depress domestic demand
and encourage spending on imports. Overvaluation is particularly a problem
during a period of sluggish growth. If the economy is booming, it can help
reduce inflationary pressure, but in a recession it can cause deflationary
pressures.
When the value of domestic currency increases as compared to foreign currency, it is termed as overvaluation. It implies that a country's currency is too high for the state of the economy. It means that the country’s exports will be relatively expensive and imports cheaper. It tends to depress domestic demand and encourage spending on imports. Overvaluation is particularly a problem during a period of sluggish growth. If the economy is booming, it can help reduce inflationary pressure, but in a recession it can cause deflationary pressures.
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