In a fixed exchange rate system, when the government increases the value of foreign currency, this change is called:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Devaluation.
The exchange rate is the price of foreign currency in rupees, and in a fixed exchange rate system it is the government that sets it. When the government increases the value of foreign currency, a dollar costs more rupees and the rupee has been made cheaper by an official decision. Such a government-made rise in the exchange rate is called devaluation.
Why the other options are incorrect
Option (1) Revaluation. — Incorrect. Revaluation is the opposite move in a fixed system: the government decreases the exchange rate, making the domestic currency costlier.
Option (2) Depreciation. — Incorrect. Depreciation is a fall in the value of the domestic currency brought about by market forces under a flexible exchange rate, not by a government decision.
Option (3) Appreciation. — Incorrect. Appreciation is a rise in the value of the domestic currency under a flexible exchange rate; here the foreign currency rises in value, by government action.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 20-05 S1 06-06 S1* | 21-05 S1 28-05 S2 | – | 30-05 S2 01-06 S1 | – |
* A similar question.
NCERT (2025-26): “Fixed Exchange Rates … In a fixed exchange rate system, when some government action increases the exchange rate (thereby, making domestic currency cheaper) is called Devaluation. On the other hand, a Revaluation is said to occur, when the Government decreases the exchange rate (thereby, making domestic currency costlier) in a fixed exchange rate system.” |