Answer to Question #175187 in Macroeconomics for kamran

Question

If a country follows a fixed exchange rate regime, what macroeconomics variables could cause the fixed exchange rate to be devalued?

Answer 1

Devaluation is the adjustment of the value of a country's money relative to another currency, group of currencies, or currency standard. In most cases, It is often confused with depreciation and is the opposite of revaluation, which is the readjustment of a currency's exchange rate.

The main aim why a country may devalue its currency is to control a trade imbalance. Devaluation decreases the cost of a country's exports, making them more competitive in the world market, which, in turn leads to increased cost of imports. For instance, if imports are more expensive, local consumers are less likely to buy them, hence strengthening domestic businesses. Because of this, the exports increases and imports decreases. In short, a country that devalues its currency can reduce its deficit because there is greater demand for cheaper exports.