Real Economic Activity and Misery. Calculate the country’s Misery Index (unemployment + inflation)

and then use it like interest differentials to forecast the future spot exchange rate, one year into the future.

a. Japanese yen/U.S. dollar exchange rate in one year

b. Japanese yen/Australian dollar exchange rate in one year

c. Australian dollar/U.S. dollar exchange rate in one year Use the table below containing economic, financial, and business indicators from October 20, 2007, issue of The Economist (print edition) to answer this problem.

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Forecasting the Pan-Pacific Pyramid: Australia, Japan and the United States Gross Domestic Product Industrial Production Unemployment Rate Forecast Forecast Country Australia Latest Qtr Qtra 2007e 2008e Recent Qtr Latest 4.3% 3.8% 4.1% 3.5% 4.6% 4.2% Japan 1.6% -1.2% 2.0% 1.9% 4.3% 3.8% United States 1.9% 3.8% 2.0% 2.2% 1.9% 4.7% Consumer Prices Interest Rates Forecast 3-month 1-yr Govt Country Year Ago Latest 2007e Latest Latest Australia 4.0% 2.1% 2.4% 6.90% 6.23% Japan 0.9% -0.2% 0.0% 0.73% 1.65% United States 2.1% 2.8% 2.8% 4.72% 4.54% Trade Balance Current Account Current Units (per US$) Country Last 12 mos (billion $) Last 12 mos Forecast 07 (billion $) (% of GDP) Oct 17th Year Ago Australia -13.0 -$47.0 -5.7% 1.12 1.33 Japan United States 98.1 -810.7 $197.5 4.6% 117 119 -$793.2 -5.6% 1.00 1.00 Source: Data abstracted from The Economist, October 20, 2007, print edition. Unless otherwise noted, percentages are per- centage changes over one year. Rec Qtr = recent quarter. Values for 2007e are estimates or forecasts.