In a fixed exchange rate system, when a government action increases the exchange rate (deliberately making domestic currency cheaper) is known as :

Devaluation

The correct answer is option (1) : Devaluation

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.