Question

what is the effect of a real appreciation of the domestic currency on the purchasing power of domestic residents?

Answer 1

Effects of a real appreciation of the domestic currency on purchasing power of domestic residents will be as follows-

A. When there would be appreciation of domestic currency, it would mean that there would be consequently the depreciation of the foreign currency so the foreign goods will be cheaper in nature and there would be higher imports in the country due to increase in the purchasing power of the resident.

B. The purchasing power of residents in a country will be increasing due to appreciation in the domestic currency and fall in the the foreign currency prices in relative to the domestic currency and they will be trying to buy more because of their increase in the disposable income

C.it will also mean that the export related to the domestic country will be lower because there would be a lesser purchasing power of outsiders and foreigners because the value of their domestic currency has decreased in respect of our domestic currency.

So it can be summarised that the effect of real appreciation on a domestic currency on the purchasing power of domestic resident would be on a positive side because it would be leading to increase in the disposable income and increase in the holding value of the assets in respect of the foreign currency and foreign goods will be cheaper to domestic residents