Question : Statement1: Devaluation refers to reduction in price of domestic currency in terms of all foreign currencies under fixed exchange rate regime.
Statement 2: Devaluation of the domestic currency makes import cheaper.
Option 1: Both the statements are true.
Option 2: Both the statements are false.
Option 3: Statement 1 is true and Statement 2 is false
Option 4: Statement 2 is true and Statement 1 is false
Correct Answer: Statement 1 is true and Statement 2 is false
Solution : The correct answer is (c) Statement 1 is true and Statement 2 is false.
Statement 1 is true. Devaluation refers to a deliberate reduction in the value of a domestic currency in relation to foreign currencies under a fixed exchange rate regime. This means that the domestic currency becomes cheaper in terms of foreign currencies.
Statement 2 is false. Devaluation of the domestic currency makes imports more expensive, not cheaper. When the domestic currency is devalued, it takes more units of the domestic currency to purchase the same amount of foreign currency, resulting in higher prices for imported goods.
