Question

Devaluation is the process in which

• A. the adverse balance of payments situation improves
• B. the government itself depreciates the value of its domestic currency in terms of foreign currency
• C. both (A) and (B)
• D. none of these

Hint:

Devaluation helps improve a country’s balance of payments by making exports cheaper and imports more expensive.

Answer 1

The Correct Option is C

Step 1: Understanding Devaluation:
Devaluation refers to a reduction in the value of a country's currency relative to other currencies. It typically occurs in a country with a fixed exchange rate system, where the government decides to lower the official value of the currency against foreign currencies.
Step 2: Effects of Devaluation:
- Option (A) The adverse balance of payments situation improves: When a country devalues its currency, its exports become cheaper for foreign buyers, which can help improve the balance of payments by increasing exports. At the same time, imports become more expensive, reducing demand for foreign goods and services.
- Option (B) The government itself depreciates the value of its domestic currency in terms of foreign currency: This is true. Devaluation is a deliberate action taken by the government to decrease the value of its domestic currency.
- Option (C) Both (A) and (B): This is the correct answer because both statements are true. Devaluation helps improve the balance of payments and is directly caused by the government’s decision to lower the value of its currency.
- Option (D) None of these: This is incorrect because option (C) is correct.
Step 3: Conclusion and Answer:
The correct answer is (C) because devaluation leads to both improved balance of payments and a deliberate depreciation of the currency by the government.