Look back at equation (20.3) in Section 20.2. (a) Apply our growth rates rules (from Chapter 3)
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(a) Apply our growth rates rules (from Chapter 3) to this equation to express the growth rate of the exchange rate as a function of the inflation rate at home and abroad.
(b) Between 1975 and 1995, U.S. inflation averaged 5.7% per year, while inflation in Japan averaged 3.6% per year. At what rate should we expect the dollar to depreciate against the yen between 1975 and 1995?
(c) Using Figure 20.1, make a rough calculation of the annual rate of depreciation of the dollar versus the yen. Do the numbers match up reasonably well?
![Look back at equation (20.3) in Section 20.2.
(a) Apply our](https://dsd5zvtm8ll6.cloudfront.net/si.question.images/image/images10/780-B-E-M-E(7323).png)
(d) What must have been happening to the real exchange rate between 1975 and 1995? Can you think of any reason why this might have occurred?
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