Chapter 18, Problem 14AA

To determine

To explain: The fact behind devaluation of nation's currency.

Explanation of Solution

A nation’s currency devaluates means the value of a currency is falling. Some of the effects of devaluation are an exchange rate devaluation would make exports more attractive and seem cheaper to foreigners. That will increase export demand. It means more expensive imports, such as gasoline, food items, and intermediate products. That will reduce import demand. Therefore higher exports are part of AD (X-M), and lower imports can rise AD (taking demand is reasonably elastic). Increased AD is likely, under normal circumstances, causing greater real GDP and inflation.

Economics Concept Introduction

Introduction: Devaluation is an official currency exchange-value decrease by a decrease in its gold equivalence or value compared to another currency. Or a fall or decrease in particular. Devaluation is usually accomplished by selling domestic currency on the market foreign exchange and purchasing other currencies.