The Following Regression Model Was Estimated to Forecast the Percentage $\mu$

question 27

Multiple Choice

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.

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Definitions:

Marginal Utility

The additional satisfaction or utility that a person receives from consuming one more unit of a good or service.

Marginal Utility

The additional satisfaction or utility gained from consuming one more unit of a good or service.

Marginal Utility

The added satisfaction a consumer gets from consuming one additional unit of a good or service.

Price Ratio

The proportionate relationship between the prices of two goods or services, indicating how many units of one good can be exchanged for one unit of another.