The Following Regression Model Was Estimated to Forecast the Percentage

Multiple Choice

The following regression model was estimated to forecast the percentage change in the Australian dollar (AUD) :

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:


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 the above