1. Let the exchange rate be defined as the number of dollars per Japanese yen. Assume that there is a relatively lower rate of inflation in the U.S. relative to that of Japan.

• Would this event cause the demand for the dollar to increase or decrease relative to the demand for the yen? Why?
• Has the dollar appreciated or depreciated in value relative to the yen?
• Does this change in the value of the dollar make imports cheaper or more expensive for Americans? Are American exports cheaper or more expensive for importers of U.S. goods in Japan? Illustrate by showing the price of a U.S. e-reader in Japan, before and after the change in the exchange rate.
• If you had a business exporting goods to Japan, and U.S. inflation fell as discussed above in this example, would you plan to expand production or cut back? Why?