1. This questions is based on the article, "Signs of a slowdown," published by The Economist on June 6, 2015. The article discusses the trends in the value of the yen and its consequences during 2012 and 2015. The average annual rate of inflation during 2013 and 2014 was 1.55 percent in both the US and Japan. Assume that the yen is the home currency so that the exchange rate is expressed in terms of US dollars per yen and the appreciation/depreciation is calculated as the percentage change of that exchange rate.

(a)The article and its chart[1] show that the yen-dollar exchange rate at the end of 2012 was e₀ =1/87$/ and by the end of 2014 reached e₁ = 1/120$/. By what percentage did the yen depreciate vis--vis the dollar in nominal terms in those two years? [4] By what percentage did the yen depreciate vis--vis the dollar in real terms in those two years? [3]

Answer:

(b)According to the article, what was the factor driving the depreciation of the yen against the dollar? [5]

Answer:

[1] The inverted scale used in the charts of the article is a fractional scale where the vertical axis label corresponds to the denominator of the fraction. So, a label of 120 corresponds to 1/120 dollars/yen.