In a fixed exchange rate system, the government’s action that increases the exchange rate of foreign currency is called?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Devaluation
The exchange rate is the price of foreign currency in rupees, and in a fixed exchange rate system it is the government that sets it. When the government increases the exchange rate of foreign currency, a dollar costs more rupees and the rupee has been made cheaper by an official decision. Such a government-made rise in the exchange rate is called devaluation.
Why the other options are incorrect
Option (1) Revaluation — Incorrect. Revaluation is the opposite move in a fixed system: the government decreases the exchange rate, making the domestic currency costlier.
Option (3) Dirty floating — Incorrect. Dirty floating is another name for the managed floating system, in which the market sets the rate and the central bank steps in by buying and selling foreign currency. It is a system, not a government change of a fixed rate.
Option (4) Hedging — Incorrect. Hedging is what a trader or firm does to protect itself against a future change in the exchange rate, for example by fixing today the rate for a payment due later. It is not a government action.
Note: A similar question was also asked in CUET (UG) 2026 on 20-05-2026 (Slot 1).
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.” |