​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:

Social Insurance

Social insurance is a government or publicly sponsored system that provides financial protection to individuals against economic risks such as unemployment, disability, or old age.

Equality-Efficiency Trade-Off

A concept in economics suggesting that there can be a trade-off between achieving economic equality and efficiency within a society.

Economic Efficiency

A situation in which all resources are allocated in a way that maximizes total benefit or output with minimal waste.

Poverty Rate

The proportion of a population living below the national poverty line, indicating the level of economic deprivation.