Economic Development and Globalisation: Question 6
Syllabus 11.2.3
Sarnovia's central bank operates a fixed exchange rate for its currency, the saro, against the US dollar. The official rate has been held at 1 saro = $0.50. Facing persistent upward pressure on the saro, the central bank deliberately announces a new, higher official rate of 1 saro = $0.60, and commits to defending this new rate.
Which term correctly describes this deliberate policy action by Sarnovia's central bank?
Show worked solution Hide worked solution
Worked solution
Working through the options
Sarnovia operates a fixed exchange rate, so any change in the saro’s official value must come from a deliberate decision by the central bank, not from the everyday interaction of market demand and supply.
- Options B and D (depreciation/appreciation) can both be ruled out immediately: these terms describe value changes under a floating exchange rate, driven purely by market forces. Sarnovia’s rate is fixed, and the change described is an explicit policy announcement, not a market movement.
- Option A (devaluation) describes a deliberate reduction in the official fixed value of a currency. Here, the saro’s official value has gone from $0.50 to $0.60. Each saro now buys more dollars, so its value has risen, not fallen. This rules out devaluation.
- Option C (revaluation) describes a deliberate increase in the official fixed value of a currency by the authority responsible for defending it. This exactly matches Sarnovia’s central bank raising the official rate from $0.50 to $0.60 per saro.
Final answer
C. This is a revaluation: a deliberate, policy-driven increase in the official value of a currency under a fixed exchange rate system.