When the exchange rate of foreign currency increases due to managed floating rate it is known as ______.

Devaluation

The correct answer is Option (1) → Devaluation

Note:  As per NTA answer sheet, the answer is devaluation and hence the answer is marked as per NTA though the correct answer should be depreciation as explained below.

When the exchange rate of foreign currency increases, it means Foreign currency becomes costlier, and domestic currency becomes weaker. It means that you now need more units of domestic currency to buy 1 unit of foreign currency. It may be due to depreciation or devaluation.

Devaluation is a deliberate policy decision by a country's government or central bank to officially lower the value of its currency against another currency, a group of currencies, or a standard like gold. Thus,devaluation happens due to a government decision in a fixed exchange rate system.

This is distinct from depreciation, which is a decrease in a currency's value due to market forces of supply and demand in a floating exchange rate system.

Under a managed floating exchange rate system, the exchange rate is primarily determined by market forces (supply and demand) but occasionally influenced by the central bank’s interventions mainly to control speculation. The government/central bank intervenes only occasionally to influence or stabilize it. In a managed floating system, thus, even though the government intervenes occasionally, the rate is not officially fixed or reset. Therefore, the increase in the foreign exchange rate is still treated as depreciation, not devaluation.