The immediate effect of devaluation of a currency of a country will be reflected in:

Question

Accepted Answer

The correct option is 1:

Devaluation is a monetary policy tool where a country's monetary authority intentionally lowers the official value of its currency relative to one or more foreign reference currencies, typically under a fixed exchange rate system. The immediate objective of this action is to make the country's goods and services cheaper for foreign buyers and foreign goods and services more expensive for domestic buyers. When a country devalues its currency, say the Indian Rupee, it takes fewer foreign dollars to buy one Rupee's worth of Indian goods. Consequently, Indian exports become cheaper and more competitive in global markets, leading to an immediate increase in the quantity demanded of exports. Conversely, foreign imports become more expensive in Rupee terms, discouraging domestic consumers and businesses from buying them, which immediately leads to a decrease in the quantity demanded of imports. This shift in relative prices is the primary, immediate effect that devaluation aims to achieve in the foreign trade balance.

The incorrect option is 2:
An increase in both exports and imports would occur if the country's economy expanded significantly, increasing overall trade volume, but not as a result of devaluation, which is specifically designed to make imports relatively less attractive.

The incorrect option is 3:
This option describes the opposite of the intended and immediate effect of devaluation. If exports decrease and imports increase, it suggests that domestic goods have become relatively more expensive and foreign goods have become cheaper, which is characteristic of currency appreciation or revaluation.

The incorrect option is 4:
A decrease in both exports and imports might happen during a global economic recession or due to protectionist policies that restrict trade, but devaluation's specific purpose is to boost exports by making them price competitive.