Assume a Forecasting Model Uses Inflation Differentials and Interest Rate

question 39

Multiple Choice

Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?

• A) The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable.
• B) The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate.
• C) The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate.
• D) The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.