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.

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Definitions:

Accounts Receivable

Funds that customers owe a business for products or services already delivered or utilized but not yet paid for.

Raw Materials

Fundamental substances or components used in the initial stages of the manufacturing process to produce goods.

Cash Disbursements

The payment of cash by a business for expenses, purchases, or obligations.

Sales

The total amount of revenue generated from selling goods or services over a given period.