Under ___________ exchange rate system, the competent authority may devalue currency to increase exports.
(Choose the correct option to fill in the blank)
Under ___________ exchange rate system, the competent authority may devalue currency to increase exports.
(Choose the correct option to fill in the blank)
Show Hint
- Fixed
- Floating
- Managed
- Fixed floating
The Correct Option is A
Solution and Explanation
Devaluation means the government lowers the official value of its currency. It can be done only when the government itself sets the rate.
A cheaper domestic currency makes exports cheaper for foreign buyers, so exports can rise.
Step 2: Find the system where this is possible:
Under the fixed exchange rate system, the authority sets the rate and can change it. So it may devalue to promote exports.
Under a floating system, demand and supply decide the rate, so there is nothing to devalue.
Step 3: Why the other options are wrong:
(B) Floating: the market decides the rate, so authorities do not devalue.
(C) Managed floating: the market mostly decides the rate and the central bank only steps in now and then. It is not formal devaluation.
(D) Fixed floating is not a standard exchange rate system.
Final Answer:
Devaluation is possible under the fixed exchange rate system. Option (A).
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