Question : When a country's currency is undervalued, it means that:
Option 1: Its value increases relative to other currencies
Option 2: Its value decreases relative to other currencies
Option 3: Its value remains the same as other currencies
Option 4: Its value cannot be determined accurately
Correct Answer:
Its value decreases relative to other currencies
Solution : The correct answer is b) Its value decreases relative to other currencies
When a country's currency is undervalued, it means that its value is lower compared to other currencies. In other words, it takes more units of the undervalued currency to exchange for a unit of another currency. This can happen due to various factors, such as market forces, government policies, or economic imbalances. An undervalued currency can make a country's exports more competitive in the international market, as they become relatively cheaper for foreign buyers. However, it also makes imports more expensive, which can impact domestic consumers and businesses.
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