The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:
$e _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mu$
Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

Question

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:

e _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mu

Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

Quizplus · Accepted Answer

The regression results a₀ = 0 and a₁ = 1 indicate that the coefficients for the inflation rates in the United States and the United Kingdom are in line with the expectations of purchasing power parity. Hence, purchasing power parity holds.

The Following Regression Analysis Was Conducted for the Inflation Rate eBP=a0+a1((1+IUS)(1+IB)−1)+μe _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mueBP​=a0​+a1​((1+IB​)(1+IUS​)​−1)+μ

The Following Regression Analysis Was Conducted for the Inflation Rate $e _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mu$