A potential issue with devaluation is that it may not affect demand if demand is inelastic.

• A. It takes a while for things to change
• B. Producers may not pass devaluation to customers
• C. Devaluation always boosts demand
• D. It is quickly passed through to all consumers

Answer: (B)

When a country devalues its currency, import costs rise and, in theory, domestic prices should increase, leading to a change in demand. But a key issue is whether producers actually pass on the higher costs to consumers. If producers absorb some or all of the devaluation, the prices paid by buyers don’t rise by the full amount, so the impact on demand is muted. This matters even when demand is inelastic: the expected price-triggered change in quantity demanded may not occur if the price to consumers doesn’t rise. So the practical concern is that devaluation may fail to influence demand because producers don’t pass the devaluation through to customers, limiting the effectiveness of the policy.