In order to promote exports in a fixed exchange rate system, the government can opt for-
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Devaluation of domestic currency
Exports rise when foreigners find a country’s goods cheap, that is, when one dollar fetches more rupees. Under a fixed exchange rate the market cannot bring this about, so the government itself raises the exchange rate and makes the rupee cheaper. This deliberate step is devaluation; it also makes imports dearer at home.
Why the other options are incorrect
Option (2) Appreciation of domestic currency — Incorrect. Appreciation means the domestic currency gains value against foreign currency. It makes domestic goods dearer for foreigners, so it discourages exports; besides, it is a market movement under a flexible rate.
Option (3) Depreciation of domestic currency — Incorrect. Depreciation also lowers the value of the domestic currency, but it is brought about by demand and supply in a flexible exchange rate system, not by a government decision under a fixed rate.
Option (4) Revaluation of domestic currency — Incorrect. Revaluation is the government raising the value of its currency under a fixed rate, the opposite of devaluation, so it makes exports dearer.
NCERT (2025-26): “Exchange Rates in the Long Run … Fixed Exchange Rates In this exchange rate system, the Government fixes the exchange rate at a particular level. … However, let us suppose that for some reason the Indian Government wants to encourage exports for which it needs to make rupee cheaper for foreigners it would do so by fixing a higher exchange rate, say Rs 70 per dollar from the current exchange rate of Rs 50 per dollar. Thus, the new exchange rate set by the Government is e1, where e1 > e.… …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.”
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