Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
Q31 (CDS-II/2017) Economy › External Sector & Trade › Exchange rate dynamics Answer Verified

Devaluation of currency will be more beneficial if prices of

Result
Your answer: —  Â·  Correct: A
Explanation

Devaluation is a deliberate reduction in the value of a country's currency relative to others, aimed at making exports cheaper and imports more expensive [6]. For devaluation to be truly beneficial, the price of domestic goods must remain constant [4]. If domestic prices rise (inflation) following devaluation, the competitive advantage gained from a weaker currency is eroded because the cost of production and the final price of exportable goods increase [5]. While devaluation naturally makes exports cheaper to foreign importers [2], this benefit is maximized only if internal price stability is maintained. If domestic inflation offsets the exchange rate adjustment, the real exchange rate does not improve, and the trade balance may not recover [1]. Therefore, keeping domestic prices constant ensures that the nominal devaluation translates into a real competitive gain in international markets.

Sources

  1. [4] https://www.investopedia.com/articles/investing/100813/interesting-facts-about-imports-and-exports.asp
  2. [6] https://www.sciencedirect.com/topics/social-sciences/currency-devaluation
  3. [5] https://www.jstor.org/stable/1880600
  4. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Supply of Foreign Exchange > p. 91
  5. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Before 1993: > p. 40
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
50%
got it right
✓ Thank you! We'll review this.

SIMILAR QUESTIONS

IAS · 2021 · Q38 Relevance score: 4.03

Consider the following statements: The effect of devaluation of a currency is that it necessarily 1. improves the competitiveness of the domestic exports in the foreign markets 2. increases the foreign value of domestic currency 3. improves the trade balance Which of the above statements is/are correct?

CDS-II · 2023 · Q63 Relevance score: 2.73

Which of the following is/are the effects of devaluation or depreciation of currency ? 1. It leads to increase in imports and decrease in exports. 2. It leads to increase in exports and decrease in imports. 3. It leads to increase in domestic inflation. 4. It leads to decrease in domestic inflation. Select the correct answer using the code given below : (a) 1 and 3 only (b) 2 and 3 only (c) 1 and 4 only (d) 3 only

IAS · 1999 · Q99 Relevance score: 1.92

Assertion (A) : Devaluation of a currency may promote export. Reason (R) : Price of the country’s products in the international market may fall due to devaluation.

CDS-II · 2016 · Q90 Relevance score: 1.46

Which of the following will be the outcome if an economy is under the inflationary pressure? 1. Domestic currency heads for depreciation. 2. Exports become less competitive with imports getting costlier. 3. Cost of borrowing decreases. 4. Bondholders get benefitted. Select the correct answer using the code given below.

IAS · 2022 · Q31 Relevance score: 0.38

Consider the following statements: 1. Tight monetary policy of US Federal Reserve could lead to capital flight. 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs). 3. Devaluation of domestic currency decreases the currency risk associated with ECBs. Which of the statements given above are correct?