Devaluation adjusts the current account balance

Steps:

• Devaluation lowers the fixed exchange rate, weakening the domestic currency.
• Exports become cheaper abroad, raising export volumes and revenues.
• Imports become costlier at home, lowering import volumes and spending.
• Net exports rise, shrinking any current account surplus toward balance.

Why B is correct:

• In fixed exchange systems, devaluation targets surplus reduction via higher net exports, per the balance of payments adjustment mechanism.

Why the others are wrong:

• A: Devaluation worsens terms of trade as import prices rise relative to export prices.
• C: Devaluation expands net exports, boosting aggregate demand.
• D: Devaluation raises import costs, potentially increasing cost-push inflation.

Final answer: B