What Is the Impact of Shocks to an AR(1) with No

question 16

Multiple Choice

What is the impact of shocks to an AR(1) with no drift if ?

• A) Shocks will gradually die away
• B) Shocks persist in the system and never die away
• C) Shocks will start to increase after the next observation but gradually die away
• D) Shocks become more and more influential as time goes on

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Definitions:

Absolute Purchasing Power Parity

Absolute Purchasing Power Parity is an economic theory that compares different countries' currencies through a "basket of goods" approach, suggesting that exchange rates should adjust to equalize the price of identical goods in different countries.

Exchange Rate

How one currency's value is represented using another currency's value.

Indian Rupees

The official currency of India, abbreviated as INR, used as a medium of exchange within the country.

Absolute Purchasing Power Parity

A theory that suggests that in the absence of transaction costs and other barriers, the purchasing power of a currency is the same domestically as it is abroad.