The Following Regression Was Conducted for the Exchange Rate of the Cyprus

question 24

Multiple Choice

The following regression was conducted for the exchange rate of the Cyprus pound (CYP) :
$e _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mu$
Regression results indicate that a₀ = 0 and a₁ = 2. 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 Cyprus pound in the future.

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Definitions:

Extrapolations

Predictions or inferences about unknown data made based on known or observed information.

Rational

In accordance with the rules of effective thought concerning coherence, consistency, practicability, simplicity, comprehensiveness, looking at the evidence and weighing it carefully, not jumping to conclusions, and so on. Rationality may not guarantee truth; all the evidence and everything we believe may point to one conclusion, and yet later generations, who know things that we do not, may see that our conclusion was incorrect. It was rational thousands of years ago to believe that the earth was flat, even though it was not true. It is not rational for us to believe the same thing, for our evidence and all sorts of other beliefs indicate, rather, that it is rational to believe that the earth is (more or less) spherical.

Best Available Evidence

The most reliable and pertinent information and data available at the time to support a decision or conclusion.

Careful Thinking

The process of thinking in a judicious, meticulous manner, ensuring attention to detail and consideration of all aspects before forming a judgment or conclusion.