The Following Regression Analysis Was Conducted for the Inflation Rate $e _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mu$

question 52

Multiple Choice

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:
$e _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mu$
Regression results indicate that a₀ = 0 and a₁ = 0.4. 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.

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Definitions:

Withdrawals

Amounts of money taken out from a business by its owner(s) for personal use, not considered business expenses.

Credit Side

The right side of an accounting ledger where increases in liabilities, equity, and income or decreases in assets and expenses are recorded.

Equipment

Tangible property used in the operation of a business that is not intended for sale, typically having a useful life longer than one year.

Credit Side

The right side of a financial ledger, where increases in liabilities, equity, and revenue, and decreases in assets and expenses are recorded.