Question

multiple choice 2 points
a \devaluation\ occurs when
a nations currency depreciates under a flexible exchange rate system.
the official price of a currency is raised.
the official price of a currency is lowered.
a nations currency appreciates under a flexible exchange rate system.

Explanation:

Define devaluation in exchange rate systems

Using the Exchange Rate Systems knowledge point

$$ \text{Devaluation} \implies \text{Deliberate downward adjustment of a country's official currency value relative to a baseline within a fixed system.} $$

Distinguish devaluation from depreciation

Using the Currency Depreciation Effects knowledge point

$$
LATEXBLOCK0
$$

Evaluate the given options

• Option 1 describes market-driven depreciation under a flexible system.
• Option 2 describes revaluation (raising the official price).
• Option 3 describes devaluation (lowering the official price).
• Option 4 describes market-driven appreciation under a flexible system.

Answer:

• a nation's currency depreciates under a flexible exchange rate system.
• the official price of a currency is raised.
• the official price of a currency is lowered. (Correct answer)
• a nation's currency appreciates under a flexible exchange rate system.