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

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Definitions:

Depression

A mental health disorder characterized by persistently low mood, lack of interest in activities, and other symptoms that impair daily functioning.

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Actions or thoughts repeatedly carried out by a person due to a compelling obsession.

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Institutions historically used for the care and confinement of individuals deemed mentally ill or otherwise societally undesirable.

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A period in European history from the fall of the Roman Empire in the 5th century to the beginning of the Renaissance in the 14th century.