[Solved] 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 country 3. Improve the trade balance Which of the above statements is/are correct?

Q8. 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 country

3. Improve 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

• Devaluation is the intentional reduction in a country’s currency’s value in comparison to another currency, group of currencies, or currency standard.

• To address a trade imbalance is one reason a nation can weaken its currency.

• Devaluation makes a nation’s exports less expensive and more competitive on the world market, which raises the price of imports.

• Domestic consumers are less likely to buy imports if they are more expensive, which helps domestic businesses grow.

• There is often a better balance of payments since the trade deficit decreases as exports rise and imports fall.

• In other words, a nation that devalues its currency might reduce its deficit since there is a greater demand for less expensive exports.