The Following Regression Model Was Estimated to Forecast the Value

Multiple Choice

The following regression model was estimated to forecast the value of the Indian rupee (INR) :

Where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the United States and India, and INF is the inflation rate differential between the United States and India in the previous period. Regression results indicate coefficients of a₀ = .003; a₁ = -.5; and a₂ = .8. Assume that INF_t - 1 = 2 percent. 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:


The expected change in the Indian rupee in period t is:

A) 3.40 percent.
B) 0.40 percent.
C) 3.10 percent.
D) 1.70 percent.
E) none of the above