Under a fixed exchange rate system,a currency devaluation will ________ the nominal exchange rate and will ________ net exports.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

Under a fixed exchange rate system, a currency devaluation will decrease the nominal exchange rate (since it is fixed, this requires government intervention to change the rate) and will increase net exports. This is because devaluation makes exports cheaper and imports more expensive, leading to an increase in demand for exports and a decrease in demand for imports.

Under a Fixed Exchange Rate System,a Currency Devaluation Will ________