Question

A country with an undervalued currency will experience

a. Price increases that exceed those in its trading partners

b. Fairly stable prices if it succeeds in sterilizing foreign exchange operations

c. Falling prices

d. Both a and b

Answer 1

A country with undervalued currency will experience as imports are more expensive and exports are cheaper due to the devalued currency. The local manufacturers do not have the motivation to become more efficient and reduce costs. As a result of which , the economy experiences inflationary pressures and prices rise.

In due course of time, the trade deficit falls due to the rise in exports and fall in imports as a result of which prices stabilise .

So, the correct option is option D.