The following regression was conducted for the exchange rate of the Cyprus pound (CYP) :
$e _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mu$
Regression results indicate that a₀ = 0 and a₁ = 2. Therefore,

Question

The following regression was conducted for the exchange rate of the Cyprus pound (CYP) :

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 = 2. Therefore,

Quizplus · Accepted Answer

The coefficient a₁ being greater than 1 (a₁ = 2) indicates that the actual change in the exchange rate was greater than what purchasing power parity predicted, meaning it underestimated the change.

The Following Regression Was Conducted for the Exchange Rate of the Cyprus