The Following Regression Model Was Estimated to Forecast the Value $\begin{array}{cc}\text { Probability } & \text { Possible Outcome } \\30\% & -2 \% \\40 \% & -3 \% \\30 \% & -4 \%\end{array}$

question 62

Multiple Choice

The following regression model was estimated to forecast the value of the Indian rupee (INR) :
INR_t = a₀ + a₁INTt + a₂INFt _-1 + m_t,
Where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of a₀ = .003; a₁ = -.5; and a₂ = .8. Assume that INFt _-1 = 2%. 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:
$\begin{array}{cc}\text { Probability } & \text { Possible Outcome } \\30\% & -2 \% \\40 \% & -3 \% \\30 \% & -4 \%\end{array}$
The expected change in the Indian rupee in period t is:

• A) 3.40%.
• B) 0.40%.
• C) 3.10%.
• D) 1.70%.
• E) none of the above

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