Devaluation occurs under fixed exchange rate regimes as which description?

• A. An increase in the value of a currency that is set under a fixed exchange rate regime.
• B. The rate at which currencies exchange automatically in free markets.
• C. A government subsidy for exporters.
• D. A reduction in the value of a currency that is set under a fixed exchange rate regime.

Answer: (D)

Under a fixed exchange rate regime, devaluation means the authorities deliberately lower the pegged value of the domestic currency relative to foreign currencies. They adjust the peg downward, which often requires using foreign reserves to defend the new rate. This makes exports cheaper and imports more expensive, helping to improve the trade balance, but it can raise domestic inflation. It’s different from an increase in value (revaluation) and from a depreciation that occurs in a floating system due to market forces. The description that matches devaluation is a reduction in the value of the currency that is set under a fixed exchange rate regime.