Chapter 43, Problem 4MCQ

To determine

The correct option for the reason of using devaluation of the currency.

Answer to Problem 4MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b.

When the cost of one country is increased then devaluation is done by the country to cover the losses. To eliminate the shortage of foreign exchange market devaluation of currency is done. By doing so devaluating country utilizes the reserves for covering the losses. Therefore, option d is correct.

Explanation for incorrect options:

a.

Country with surplus funds in the foreign exchange market does not require to devalue its currency.

c.

Devaluation of a currency is not done to achieve a lower aggregate demand level.

d.

Lower inflation rate can be achieved by appropriately managing the money supply.

e.

Devaluation is usually done to revive the economy not to achieve a floating exchange rate regime.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.