ASSIGNMENT # 2
-BUSINESS FINANCE-
1.) What is devaluation?
-the reduction in the official value of a currency in relation to other currencies. Also the deliberate
downward adjustment in the official exchange rate, reduces the currency's value
Devaluation is the deliberate downward adjustment of the value of a country's money relative to
another currency, group of currencies, or currency standard. Countries that have a fixed exchange rate
or semi-fixed exchange rate use this monetary policy tool.
2.)What is revaluation?
-Revaluation is a change in a price of a good or product, or especially of a currency, in which case it is
specifically an official rise of the value of the currency in relation to a foreign currency in a fixed
exchange rate system. A revaluation is a calculated upward adjustment to a country's official exchange
rate relative to a chosen baseline, such as wage rates, the price of gold, or a foreign currency. In a fixed
exchange rate regime, only a country's government, such as its central bank, can change the official
value of the currency.
3.)What are the effects of
a. Devaluation - A key effect of devaluation is that it makes the domestic currency cheaper relative to
other currencies.Currency devaluation involves taking measures to strategically lower the purchasing
power of a nation's own currency.Countries may pursue such a strategy to gain a competitive edge in
global trade and reduce sovereign debt burdens.Devaluation, however, can have unintended
consequences that are self-defeating.
b. Revaluation - Revaluation of currencies can cause either high inflation or low inflation. If the exporting
country's currency revaluates, demand for its goods will decrease, thereby leading to high
inflation.When a government conducts a revaluation, or revalues its currency, it changes the fixed
exchange rate in a way that makes its currency worth more. Since the exchange rates are usually
bilateral, an increase in the value of one currency corresponds to a decline in the value of another
currency.Appreciation and revaluation of currency make the exports less competitive in the
international market. This leads to a decrease in the country's exports. Imports: The imports become
cheaper and thus there is an overall increase and the imports.
4.) How is the impact of exchange rate changes affected by price elasticity of demand?
-When exchange rates change, the prices of imported goods will change in value, including domestic
products that rely on imported parts and raw materials. Exchange rates also impact investment
performance, interest rates and inflation - and can even extend to influence the job market and real
estate sector. Price Elasticity is the responsiveness of demand to change in price; income elasticity
means a change in demand in response to a change in the consumer's income; and cross elasticity
means a change in the demand for a commodity owing to change in the price of another commodity.
5.) How many exchange rate fluctuation affects a businesse pricing strategies?
-Exchange rate volatility can also have an effect on competition. Depreciation of your local currency
makes the cost of importing goods more expensive, which could lead to a decreased volume of imports.
Domestic companies should benefit from this as a result of increased sales, profits and jobs.
12.4 currency fluctuations and Global pricing.
6.) How does devaluation cause cost-push inflation?
-A devaluation leads to a decline in the value of a currency making exports more competitive and
imports more expensive. Generally, a devaluation is likely to contribute to inflationary pressures
because of higher import prices and rising demand for exports.
Causes of cost-push inflation
Monopoly. Companies that achieve a monopoly in an industry can create cost-push inflation. ...
Wage Inflation. Wage inflation occurs when workers have enough leverage to force through wage
increases. ...
Natural Disasters. ...
Government Regulation and Taxation. ...
Exchange Rates.
