The following regression model was estimated to forecast the percentage change in the Australian dollar (AUD):
AUD_t = a₀ + a₁INT_t + a₂INF_t _- ₁ +

\mu

_t,

Where AUD is the quarterly change in the Australian dollar, INT is the real interest rate differential in period t between the United States and Australia, and INF is the inflation rate differential between the United States and Australia in the previous period. Regression results indicate coefficients of a₀ = .001; a₁ = -.8; and a₂ = .5. Assume that INF_t _-₁ = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:

Probability
Possible Outcome
20%
-3%
80%
-4%

There is a 20 percent probability that the Australian dollar will change by ____, and an 80 percent probability it will change by ____.
A) 4.5 percent; 6.1 percent
B) 6.1 percent; 4.5 percent
C) 4.5 percent; 5.3 percent
D) None of these are correct.

If Today's Exchange Rate Reflects All Relevant Public Information About

Multiple Choice

Correct Answer:VerifiedUnlock this answer nowGet Access to more Verified Answers free of chargeAccess For Free

Correct Answer:
Verified
Unlock this answer now
Get Access to more Verified Answers free of charge