The Following Regression Analysis Was Conducted for the Inflation Rate

question 22

Multiple Choice

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:
Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

• A)purchasing power parity holds.
• B)purchasing power parity overestimated the exchange rate change during the period under examination.
• C)purchasing power parity underestimated the exchange rate change during the period under examination.
• D)purchasing power parity will overestimate the exchange rate change of the British pound in the future.

---

Definitions:

Face Value

The nominal value printed on a bond or share, representing its legal value rather than market value.

Bond Discount

The difference when bonds are sold for less than their face value, indicating investors require a higher yield due to perceived risks or interest rates being higher than the bond's rate.

Accrued Interest

Interest that has been incurred but not yet paid, often relating to bonds or loans.

Semiannual Interest Expense

Interest expense that is due or accrued every six months on outstanding debts.