Consider the following statements:The effect of devaluation of a currency is that it necessarily1.improves the competitiveness of the domestic exports in the foreign markets.2.increases the foreign value of domestic currency3.improves the trade balanceWhich of the above statements is/are correct?

1. A

   1 only

   1 only. Devaluation cheapens exports in foreign-currency terms. It does not raise the foreign value of the home currency, and the trade balance need not improve (J-curve, elasticities).

2. B

   1 and 2

   1 and 2. Statement 2 is the opposite of devaluation.

3. C

   3 only

   3 only. Trade balance is not a necessary result.

4. D

   2 and 3

   2 and 3. Both fail.

Summary. Official key is (a) 1 only. A cheaper rupee makes exports more competitive abroad. The rupee’s foreign value falls, not rises. Whether the trade balance improves depends on elasticities — it is not necessary.