When the government increases the exchange rate of domestic currency in terms of foreign currency (by making domestic currency costlier) in a fixed exchange rate system, that increase called:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Revaluation
Under a fixed exchange rate system it is the government, not the market, that sets the value of the currency, so only the government can change it. When it raises the value so that the domestic currency becomes costlier in terms of foreign currency, the change is called revaluation. The opposite change, which makes the domestic currency cheaper, is devaluation.
The question states the exchange rate as the price of the domestic currency in foreign currency, and its bracket says what the change does. When the rate is stated the other way, as rupees per unit of foreign currency, the same change shows up as a fall in that rate. Either way the domestic currency gains value, and under a fixed rate that is revaluation.
Why the other options are incorrect
Option (2) Appreciation — Incorrect. Appreciation is the same rise in the value of the domestic currency, but brought about by demand and supply under a flexible exchange rate, not by the government in a fixed system.
Option (3) Devaluation — Incorrect. Devaluation is the government action in a fixed system that makes the domestic currency cheaper, the opposite of the change described.
Option (4) Depreciation — Incorrect. Depreciation is a fall in the value of the domestic currency under a flexible exchange rate; it is wrong on both counts, the direction and the system.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 31-05 S1 | – | – | 22-06 S3 | 10-08 S2 |
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.” |