​Assume a Forecasting Model Uses Inflation Differentials and Interest Rate

question 23

Multiple Choice

​Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?

• A) ​The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable.
• B) ​The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate.
• C) ​The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate.
• D) ​The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.

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Definitions:

Utility Maximizing

The economic principle where consumers allocate their resources to maximize their overall satisfaction or utility.

Consumption Mix

Refers to the combination of goods and services consumed by an individual or within an economy.

Theory of Consumer Behavior

An economic framework describing how individuals make decisions to allocate their resources on consumption items, based on their preferences, income, and the prices of goods and services.

Diminishing Marginal Utility

The principle that as a consumer increases consumption of a good or service, the incremental satisfaction gained from consuming each additional unit decreases.