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Question

The term _________ means to increase the value of domestic currency compared to foreign currency.

A
overvaluation
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B
increase in price index
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C
monetary measures
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D
bloatedness/ Inflated 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.

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