The reduction in the value of a country’s currency in relation to the value of the currencies of other nation is known as____________

1. Analyze the question The question asks for the term describing a reduction in the value of a country's currency relative to other countries' currencies. The key phrase is "in relation to the value of the currencies of other nations," which points to the exchange rate, not the general price level.

2. Explain the concepts

• Deflation: a general fall in the price level of goods and services in an economy (the purchasing power of money rises).
• Inflation: a general and persistent rise in the price level (the purchasing power of money falls).
• Devaluation: a deliberate, official reduction in the value of a country's currency relative to other currencies, usually done by the government or central bank under a fixed or managed exchange rate system.
• Revaluation: a deliberate, official increase in the value of a country's currency relative to other currencies.

3. Solution

• Deflation and inflation both deal with domestic prices, not the currency's value against foreign currencies. So A and B are out.
• Revaluation is an increase in the currency's value, the opposite of what the question describes. So D is out.
• Devaluation is a reduction in the external value of a currency against other currencies. This matches the question exactly.

Example: if the naira moves from ₦400 = $1 to ₦600 =$1 by official policy, the naira has been devalued, because more naira is needed to buy one dollar.

4. Answer The correct option is C. Devaluation.

5. Exam tip Remember: Devaluation = down (value falls against other currencies). Revaluation = raise. Also, inflation and deflation concern prices at home, while devaluation and revaluation concern currency value abroad.