In a fixed exchange rate regime, devaluation refers to which description?

In a fixed exchange rate regime, devaluation refers to which description?

• A. A reduction in the value of a currency that is set under a fixed exchange rate regime.
• B. An increase in the value of a currency.
• C. A policy of free-floating exchange rates.
• D. Removal of all trade barriers.

Answer: (A)

In a fixed exchange rate system, the value of the currency is kept at a specific parity against another currency or basket. Devaluation is the official lowering of that fixed value. It’s a deliberate policy move by the authorities, not a market-driven change, and it changes how much domestic currency is needed to buy foreign currency. When the currency is devalued, exports generally become cheaper to foreign buyers and imports become more expensive, which can influence the trade balance and inflation. It can also affect any debt denominated in foreign currency. An increase in value would be a revaluation, not devaluation. A policy of free-floating exchange rates describes a different regime where the currency value is determined by market forces rather than a fixed peg. Removal of all trade barriers is unrelated to how the currency is valued.

In a fixed exchange rate system, the value of the currency is kept at a specific parity against another currency or basket. Devaluation is the official lowering of that fixed value. It’s a deliberate policy move by the authorities, not a market-driven change, and it changes how much domestic currency is needed to buy foreign currency. When the currency is devalued, exports generally become cheaper to foreign buyers and imports become more expensive, which can influence the trade balance and inflation. It can also affect any debt denominated in foreign currency.

An increase in value would be a revaluation, not devaluation. A policy of free-floating exchange rates describes a different regime where the currency value is determined by market forces rather than a fixed peg. Removal of all trade barriers is unrelated to how the currency is valued.