Devaluation of currency will be more beneficial if prices of

The correct answer is exports become cheaper to importers.

Key Points

• Devaluation of a currency:
  • Devaluation of currency will be more beneficial if prices of exports become cheaper to importers. Hence, Option 2 is correct.

  • Devaluation of a currency is associated with countries having a fixed exchange rate regime.
  • Under the fixed-rate regime, the central bank or the government decides the value of the currency concerning other foreign currencies.
  • The central bank or the government purchases or sells its currencies to maintain the exchange rate.
  • When the government or the central bank reduces the value of its currency, then it is known as the devaluation of the currency.

Additional Information

• • Under this, the value of the domestic currency is deliberately reduced in terms of other foreign currencies.

  • For example, in 1966 when India was following the fixed exchange rate regime, the  Indian Rupee was devalued by 36 %.

  • Devaluation is one of the monetary policy tools.

  • It is often used to combat the trade imbalance.

  • Devaluation is beneficial for the economy of a country as it makes the country more competitive in the global market.