Q58. Consider the following statements: The effect of devaluation of a currency is that it necessarily
- Improves the competitiveness of domestic exports in foreign markets
- Increases the foreign value of domestic currency
- Improves the trade balance
Which of the above statements is/are correct?
a) 1 only
b) 1 and 2
c) 3 only
d) 2 and 3
Answer: (a)
- Statement 1 is correct: A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of a devaluation. First, devaluation makes the country’s exports relatively less expensive for foreigners. Second, the devaluation makes products more expensive for domestic consumers, thus discouraging imports. This may help to increase the country’s exports and decrease imports, and may therefore help to reduce the current account deficit.
- Statements 2 and 3 are incorrect: Devaluation of a currency decreases the foreign value of the domestic currency
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