Chapter 14: Problem 12

What is the purpose of a currency devaluation? What about a currency revaluation?

Short Answer

Expert verified

Currency devaluation is when a country intentionally reduces the value of its currency, making its exports cheaper and imports more expensive to stimulate local economy. Currency revaluation is the opposite, where a country officially increases its currency value, making imports cheaper and exports more expensive, typically carried out when a currency is undervalued.

Step by step solution

Understanding Currency Devaluation

Currency devaluation is a monetary policy tool used by governments. It implies intentionally reducing the value of a country's currency relative to other currencies. This is usually done in a fixed exchange rate regime. Lower value of currency makes a country's exports relatively less expensive, potentially increasing their competitiveness in international markets. At the same time, imports become more expensive which encourages consumers to buy local goods and services.

Understanding Currency Revaluation

Currency Revaluation is the official increase of a country's currency value in a fixed exchange rate system, the opposite of devaluation. Governments often engage in revaluation when they know their currency is undervalued. Currency revaluation makes a country's imports cheaper and exports more expensive, affecting the trade balance negatively.

Summarizing the Concepts

Both currency devaluation and revaluation can be used as tools by a country to control inflation, regulate trade balances, control money supply, and manage economic growth. However, these monetary policies should be applied carefully, as multiple factors are at play in global markets and changes might not always yield the expected results

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What is the purpose of a currency devaluation? What about a currency revaluation?

Short Answer

Step by step solution

Understanding Currency Devaluation

Understanding Currency Revaluation

Summarizing the Concepts

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