5) Suppose you learn that the current exchange rate for the Japanese Yen is $1 = 120 yen. (10p)

a. If you expect Japanese monetary growth to be a total of 25% larger over the next ten years than US monetary growth, what is your best guess as to the exchange rate ten years from now? What theory underlies your prediction? Explain why we apply this theory here over a long run period, like 10 years, rather than over a short period, say less than a year?

b. If you expect that in addition to the higher money growth rate in Japan above, you also expect the output growth rate to be higher in Japan by 30%. Would you predict that the value of the Japanese yen will appreciate or depreciate relative the dollar (more or fewer dollars per yen).