When a government action increases the exchange rate, by making the domestic currency cheaper, it is called...........
Answer & explanation
Correct answer: option 2
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.