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Q40 (IAS/1994) Economy › External Sector & Trade › Exchange rate dynamics Answer Verified

Devaluation of a currency means

Result
Your answer: —  ·  Correct: A
Explanation

Devaluation is a deliberate government action under a fixed exchange rate regime that reduces the domestic currency’s official value relative to foreign currencies, thereby making the domestic currency cheaper in terms of internationally traded currencies [1]. It is distinct from depreciation, which is an exchange-rate fall that occurs under a flexible (floating) system due to market forces; devaluation specifically refers to an upward adjustment in the official exchange rate set by authorities, increasing the quantity of domestic currency needed to buy a unit of foreign currency [2]. Thus, devaluation means a reduction in the value of a currency vis-à-vis major internationally traded currencies under a fixed-rate system [2].

Sources

  1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Fixed Exchange Rates > p. 94
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > WHICH EXCHANGE RATE SYSTEM SUITS AN ECONOMY BEST? > p. 495
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SIMILAR QUESTIONS

IAS · 2021 · Q38 Relevance score: 1.18

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?

IAS · 1999 · Q99 Relevance score: 0.86

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 · 2023 · Q63 Relevance score: 0.10

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

CDS-II · 2017 · Q31 Relevance score: -0.37

Devaluation of currency will be more beneficial if prices of

CDS-I · 2023 · Q18 Relevance score: -0.99

The sustained decrease in the general price level is called as (a) deflation (b) stagflation (c) devaluation (d) recession