The Following Regression Model Was Estimated to Forecast the Value $\mu$

question 62

Multiple Choice

The following regression model was estimated to forecast the value of the Indian rupee (INR) : INR_t = a₀ + a₁INT_t + a₂INF_{t - 1} + $\mu$ _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 INF_{t - 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:
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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