Under the fixed exchange rate system, if the government decreases the value of domestic currency with respect to a foreign currency, it is known as __________ of currency.
(Choose the correct option to fill in the blank)
Under the fixed exchange rate system, if the government decreases the value of domestic currency with respect to a foreign currency, it is known as __________ of currency.
(Choose the correct option to fill in the blank)
Show Hint
- Devaluation
- Depreciation
- Appreciation
- Revaluation
The Correct Option is A
Solution and Explanation
The question says the fixed exchange rate system. Here the government fixes the rate and can change it by a decision.
Changes in a fixed rate are called devaluation or revaluation. Changes in a flexible rate are called depreciation or appreciation.
Step 2: Match the action to the term:
The government lowers the value of the domestic currency against a foreign currency. A deliberate official cut under a fixed rate is called devaluation.
For example, if the rate is changed from Rs. 70 to Rs. 75 per dollar by an order, the rupee is devalued.
Step 3: Why the other options are wrong:
(B) Depreciation is a market-driven fall in value under the flexible system.
(C) Appreciation is a market-driven rise in value under the flexible system.
(D) Revaluation is a deliberate official rise in value under the fixed system, the opposite of the given case.
Final Answer:
The government decreases the value of the domestic currency. This is devaluation, option (A).
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