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:
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
Correct Answer:
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