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:

Purchase-Money Security Interest

A legal claim granted to lenders over items purchased, serving as collateral for the loan used to purchase the goods.

Possession Of Collateral

Holding or control over property or assets pledged as security for a loan or obligation.

Private Sale

A transaction of goods or property conducted directly between individuals or parties without the involvement of a public auction or open market.

Public Sale

The process of selling goods or assets to the highest bidder in an open and public manner.