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The Following Regression Model Was Estimated to Forecast the Percentage  Probability  Possible Outcom 20%3%80%4%\begin{array}{cc}\text { Probability } & \text { Possible Outcom } \\20 \% & -3 \% \\80 \% & -4 \%\end{array}

Question 67

Multiple Choice

The following regression model was estimated to forecast the percentage change in the Australian Dollar (AUD) :
AUDt = a0 + a1INTt + a2INFt -1 + mt,
Where AUD is the quarterly change in the Australian Dollar, INT is the real interest rate differential in period t between the U.S. and Australia, and INF is the inflation rate differential between the U.S. and Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = -.8; and a2 = .5. Assume that INFt -1 = 4%. 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:
 Probability  Possible Outcom 20%3%80%4%\begin{array}{cc}\text { Probability } & \text { Possible Outcom } \\20 \% & -3 \% \\80 \% & -4 \%\end{array}
There is a 20% probability that the Australian dollar will change by ____, and an 80% probability it will change by ____.


A) 4.5%; 6.1%;
B) 6.1%; 4.5%
C) 4.5%; 5.3%
D) None of the above

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