The Following Regression Model Was Estimated by Delta Corporation to Forecast

question 15

Multiple Choice

The following regression model was estimated by Delta Corporation to forecast the value of the Indian rupee (INR) :
$$I N R_{t}=a_{0}+a_{1} I N T_{t}+a_{2} I N F_{t-1}+\mu_{t}$$
where INR is the quarterly change in the rupee, $I N T$ is the real interest rate differential in period $t$ between the U.S. and India, and $I N F$ is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of $a_{0}=.003 ; a_{1}=-.5$ ; and $a_{2}=.8$ . Assume that $I N F_{t-1}=2 \%$ . However, the interest rate differential is not known at the beginning of period $t$ and must be estimated. Delta Corp. has developed the following probability distribution:

The expected change in the Indian rupee in period $t$ is:

• A) 3.40%.
• B) 0.40%.
• C) 3.10%.
• D) 1.70%.
• E) none of the above

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