The Following Regression Model Was Estimated to Forecast the Percentage $\begin{array}{cc}\text { Probability } & \text { Possible Outcom } \\20 \% & -3 \% \\80 \% & -4 \%\end{array}$

question 83

Multiple Choice

The following regression model was estimated to forecast the percentage change in the Australian Dollar (AUD) :
AUD_t = a₀ + a₁INTt + a₂INFt _-1 + m_t,
Where AUD is the quarterly change in the Australian Dollar, INT is the real interest rate differential in period t between the U.S. and Australia, and INF is the inflation rate differential between the U.S. and Australia in the previous period. Regression results indicate coefficients of a₀ = .001; a₁ = -.8; and a₂ = .5. Assume that INFt _-1 = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:
$\begin{array}{cc}\text { Probability } & \text { Possible Outcom } \\20 \% & -3 \% \\80 \% & -4 \%\end{array}$
There is a 20% probability that the Australian dollar will change by ____, and an 80% probability it will change by ____.

• A) 4.5%; 6.1%;
• B) 6.1%; 4.5%
• C) 4.5%; 5.3%
• D) None of the above

---

Definitions:

Insurance

A financial agreement where a company provides compensation for specified losses, damage, illness, or death in exchange for premium payments.

Wealth

Refers to the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions.

Expected Utility Function

A mathematical representation of a decision-maker's preferences concerning uncertain outcomes, factoring in the utility of each outcome and its probability.

Utility Function

A formulation used in economics to depict how different combinations of goods or services yield varying levels of happiness or utility to an individual.