When a government action increases the exchange rate, by making the domestic currency cheaper, it is called...........

Devaluation

The correct answer is Option (2) → Devaluation

When the government or central bank intentionally reduces the value of the domestic currency in terms of foreign currency under a fixed exchange rate system, it is called Devaluation.

• Devaluation makes domestic currency cheaper relative to foreign currencies.

• This helps boost exports (as they become cheaper abroad) and discourage imports (as they become costlier).

Other Options:

• Depreciation: Happens under a flexible exchange rate system, due to market forces, not direct government action.

• Revaluation: The opposite of devaluation — government increases the value of domestic currency under a fixed rate system.

• Appreciation: Occurs under a flexible exchange rate, when currency gains value due to market forces.