Devaluation Revaluation Increases imports Increases exports Increases the balance of payments on the current account Reduces an inflationary gap if exists Makes domestic goods cheaper for holders of foreign currency Fixed exchange rate regime Flexible (Floating) exchange rate regime Certainty about the value of a currency distorts incentives for importing and exporting goods and services Signals a commitment not to engage in inflationary policies Enables policy makers to engage in monetary policy Solution Devaluation Revaluation Increases imports Increases exports Increases the balance of payments on the current account Reduces an inflationary gap if exists Makes domestic goods cheaper for holders of foreign currency Fixed exchange rate regime Flexible (Floating) exchange rate regime Certainty about the value of a currency distorts incentives for importing and exporting goods and services Signals a commitment not to engage in inflationary policies Enables policy makers to engage in monetary policy.

1. Devaluation Revaluation Increases imports Increases exports Increases the balance of
payments on the current account Reduces an inflationary gap if exists Makes domestic goods
cheaper for holders of foreign currency Fixed exchange rate regime Flexible (Floating)
exchange rate regime Certainty about the value of a currency distorts incentives for importing
and exporting goods and services Signals a commitment not to engage in inflationary policies
Enables policy makers to engage in monetary policy
Solution
Devaluation Revaluation Increases imports Increases exports Increases the balance of
payments on the current account Reduces an inflationary gap if exists Makes domestic goods
cheaper for holders of foreign currency Fixed exchange rate regime Flexible (Floating)
exchange rate regime Certainty about the value of a currency distorts incentives for importing
and exporting goods and services Signals a commitment not to engage in inflationary policies
Enables policy makers to engage in monetary policy