3. Nominal and Real Exchange Rates a. In one sentence, describe what it means when we say the US dollar has depreciated against the Euro. b. Let's say the dollar-yen exchange rate is around 110 yen per dollar. Suppose that over the next five years, the dollar appreciates by 25 percent against the yen. What will the exchange rate then be? c. Suppose that over this same time period, inflation in the US runs at 2 percent per year, while Japan experiences 1 percent deflation. What would be the real appreciation or depreciation of the dollar against the yen? d. Look at the graph below, showing indexes of the real and nominal value of the dollar over recent decades (higher values mean stronger). For the full time period, was average US inflation higher than, lower than, or roughly similar to inflation in its trade partners? What about for the sub-periods: 1973-1985, 1985-1995, and 1995 to the present? 150 140 130 120 Real Dollar Index 110 100 90 Nominal Dollar Index 1975 1980 1985 1990 1995 2000 2005 2010 2015