Use the information contained in the following excerpts from Kasa (1995) to assess how much of the long-term trends in t

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Use the information contained in the following excerpts fromKasa (1995) to assess how much of the long-term trends in theyen-dollar and mark-dollar exchange rates in 1970–94 can beexplained by the purchasing power parity theory andBalassa-Samuelson model, respectively. “Note that except for abrief interlude between 1980 and 1985, the dollar has depreciatedsteadily during the past 25 years. In 1970, a dollar was worth 358yen and 3.65 marks. By 1994, the dollar was worth only 102 yen and1.62 marks.” “Specifically, on average the dollar has depreciated4.9 percent per year against the yen, and 3.2 percent per yearagainst the mark. At the same time, U.S. inflation has exceededJapanese inflation by 0.9 percent on average, and exceeded Germaninflation by 1.9 percent on average.” “At the same time, Japaneselabor productivity growth in manufacturing (a proxy for the tradedgoods sector), has been 2.1 percent higher on average than in theU.S., while German labor productivity growth has on average been1.1 percent higher.” [Kasa, K., (1995). “Understanding Trends inForeign Exchange Rates”, FRBSF Weekly Letter, 9 June. FederalReserve Bank of San Francisco.]