A) A fall in the domestic value of a currency
B) A fall in the external value of a currency caused by the market forces
C) A fall in the external value of a currency caused by the government action
D) None of the above
Correct Answer: C
Solution :
[c] Devaluating a currency is decided by the government issuing the currency, and unlike depreciation, is not the result of non-governmental activities. One reason a country may devaluate its currency is to combat trade imbalances. Devaluation causes a country's exports to become less expensive, making them more competitive on the global market. This in turn means that imports are more expensive, making domestic consumers less likely to purchase them. While devaluating a currency can seem like an attractive option, it can have negative consequences. By making imports more expensive, it protects domestic industries who may then become less efficient without the pressure of competition. Higher exports relative to imports can also increase aggregate demand, which can lead to inflation.
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