Devaluing the exchange rate typically leads to a decrease in short-term interest rates.

• A. Increase short-term interest rates
• B. Decrease short-term interest rates
• C. No change in interest rates
• D. Cause immediate inflation

Answer: (B)

Devaluing the exchange rate is a device used to boost domestic demand by making exports more competitive and imports relatively more expensive. That growth impulse is usually supported by turning to looser monetary policy in the short run—lowering short‑term interest rates to reduce borrowing costs and encourage investment and spending. The goal is to amplify the expansionary effect of the weaker currency, helping output and employment rise more quickly. While inflationary pressure from a weaker currency can push policy rates up later, the immediate policy stance in the face of devaluation tends to be easier money, hence lower short‑term rates.