Which of the following is/are the effects of devaluation or depreciation of currency ?
- 1. It leads to increase in imports and decrease in exports.
- 2. It leads to increase in exports and decrease in imports.
- 3. It leads to increase in domestic inflation.
- 4. It leads to decrease in domestic inflation.
Select the correct answer using the code given below :
[amp_mcq option1=”1 and 3 only” option2=”1 and 4 only” option3=”2 and 3 only” option4=”3 only” correct=”option3″]
This question was previously asked in
UPSC CDS-2 – 2023
2. **It leads to increase in exports and decrease in imports:** Correct. This is the primary intended effect of depreciation/devaluation, improving the trade balance.
3. **It leads to increase in domestic inflation:** Correct. Imports become more expensive, increasing the cost of imported raw materials and finished goods, leading to cost-push inflation. Increased foreign demand for domestic goods can also lead to higher prices if supply cannot keep up (demand-pull inflation).
4. **It leads to decrease in domestic inflation:** Incorrect.