Devaluation is a deliberate reduction in the value of the currency relative to another currency or a group of currencies. Devaluation is a monetary policy tool that is used when there is a fixed or semi-fixed exchange system in a country. Devaluation can be done by decreasing the demand for the currency or increasing the supply of the currency deliberately. This can be shown in the graphs below.

Devaluation is different from depreciation in the sense that while the former is the reduction in the value of a currency deliberately, the latter refers to a fall in the value of a currency as a result of a change in the forces of demand and supply. WHich means depreciation of a currency occurs in a flexible exchange rate regime where the exchange rate is determined by the forces of demand and supply.

A country may opt for devaluating its currency if it wants to boost exports or shrink deficits. When a currency is devaluated it makes it cheaper for other countries to import our goods and even more expensive for domestic consumers to import. This helps in boosting exports and shrinking deficits.

The main macroeconomic impacts of devaluation are as follows:

• As the value of our currency falls, exports become cheaper.
• It also leads to making imports more expensive.
• In the short run, devaluation can also cause inflation as the demand for the goods in the country will rise invariably,

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