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Question

Consider the following statements:
The effect of devaluation of a currency is that it necessarily

1. improves the competitiveness of the domestic exports in the foreign markets
2. increases the foreign value of domestic currency
3. improves the trade balance

Which of the above statements is/are correct?
(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and 3

Answer:

A

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Explanation:

When a currency is devalued, it becomes relatively cheaper compared to other currencies. This makes the country's exports more affordable in foreign markets, increasing their competitiveness.

Statement 2 is opposite of devaluation.

Devaluation may not necessarily improve trade. It depends of country to country as devaluation makes imports expensive.

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