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Consider the following statements in regard to devaluation and depreciation of a currency:
(1) Devaluation is an activity conducted by central government whereas depreciation happens due to market forces.
(2) In both the devaluation and depreciation currency loses value against other currencies in a floating currency exchange market:
Which of the statements given above is/are correct?
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- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Correct Option: A
Devaluation happens in countries with a fixed exchange rate. In a fixed-rate economy, the government decides what its currency should be worth compared with that other countries. The exchange rate can change only when the government decide to change it. If a government decide to make its currency less valuable, the change is called devaluation. Depreciation happens in countries with a floating exchange rate. A floating exchange rate means that the global investment market determines the value of a country's currency.
