Sulsa Inc Uses Fundamental Forecasting The Most Recent Quarterly Percentage Change in the Inflation Differential

question 27

Multiple Choice

Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro:
$$\begin{aligned}\text { euro } _ { t } & = b _ { 0 } + b _ { 1 } I N F _ { t - 1 } + b _ { 2 } I N C _ { t - 1 } \\& = .005 + .9 I N F _ { t - 1 } + 1.1 I N C _ { t - 1 }\end{aligned}$$
The most recent quarterly percentage change in the inflation differential between the U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was -1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%.

• A) appreciation; 3.4
• B) depreciation; 3.4
• C) appreciation; 0.7
• D) appreciation; 1.2