A regression model was applied to explain movements in the Canadian dollar's value over time. The coefficient for the inflation differential between the United States and Canada was 0.2. The coefficient of the interest rate differential between the United States and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.
A) increases; increases
B) decreases; increases
C) increases; decreases
D) decreases; decreases

Question

Quizplus · Accepted Answer

According to the information given in the question, when the inflation differential between the United States and Canada increases, the coefficient is 0.2 which suggests that the Canadian dollar would depreciate. Similarly, when the interest rate differential between the United States and Canada decreases, the coefficient is 0.8 which also suggests that the Canadian dollar would depreciate. Therefore, the answer is C - the Canadian dollar depreciates when the inflation differential increases and the interest rate differential decreases.

A Regression Model Was Applied to Explain Movements in the Canadian