The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:
Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

Question

Quizplus · Accepted Answer

The regression results indicate that the intercept (a₀) is 0 and the slope (a₁) is 1. This means that the inflation rate and exchange rate have a 1-to-1 relationship, which supports purchasing power parity. In other words, the exchange rate reflects the relative purchasing power of the two currencies, and there is no over- or under-estimation of the exchange rate change during the examined period. Therefore, the best choice is A, purchasing power parity holds. Option B and C are incorrect because the regression results do not indicate any over- or under-estimation of the exchange rate change. Option D is incorrect because there is no indication from the regression results that purchasing power parity will overestimate the exchange rate change in the future.

The Following Regression Analysis Was Conducted for the Inflation Rate