ECONOMICS
ECONOMIC DEVELOPMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Decreasing the value of a fixed exchange rate helps exporters to make more profit
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Decreasing the value of a floating exchange rate helps increase costs for exporters
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Decreasing the value of a fixed exchange rate helps increase costs for exporters
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Decreasing the value of a floating exchange ratecan help increase exports
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Detailed explanation-1: -Devaluation reduces the cost of a country’s exports, rendering them more competitive in the global market, which, in turn, increases the cost of imports. If imports are more expensive, domestic consumers are less likely to purchase them, further strengthening domestic businesses.
Detailed explanation-2: -Currency devaluation forces domestic consumers to look for local alternatives to imported products, which then provides a boost to the domestic industry. This combination of export-led growth and increased domestic demand usually contributes to higher employment and faster economic growth.
Detailed explanation-3: -Devaluation, the deliberate downward adjustment in the official exchange rate, reduces the currency’s value; in contrast, a revaluation is an upward change in the currency’s value. A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies.
Detailed explanation-4: -Yes, devaluation helps in boosting exports because the goods become relatively cheaper for foreign consumers as the value of domestic currency goes down when compared to foreign currency. Devaluation helps in reducing the trade deficit.
Detailed explanation-5: -However, both devaluation and depreciation lead to a fall in the value of the domestic currency in relation to the foreign currency. Consequently, domestic goods become cheaper in terms of foreign currency. Accordingly, exports tend to rise (while imports are discouraged).