Which of the following is/are the effects of devaluation or depreciation of currency?<br>1. It leads to increase in imports and decrease in exports.<br>2. It leads to increase in exports and decrease in imports.<br>3. It leads to increase in domestic inflation.<br>4. It leads to decrease in domestic inflation.<br>Select the <strong>correct</strong> answer using the code given below :
- A. 1 and 3 only
- B. 1 and 4 only
- C. 2 and 3 only ✓
- D. 3 only
Correct Answer: C. 2 and 3 only
Explanation
Depreciation of a currency makes exports cheaper and imports more expensive, thereby increasing exports and decreasing imports. It also increases domestic inflation as imported goods become costlier.
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