A regression model was applied to explain movements in the Canadian dollar's value over time. The coefficient for the inflation differential between the U.S. and Canada was -0.2. The coefficient of the interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.
A) increases; increases
B) decreases; increases
C) increases; decreases
D) Increases; decreases

Question

Quizplus · Accepted Answer

According to the given information, the coefficient for the inflation differential is negative (-0.2), which means that when the inflation differential between the U.S. and Canada increases (i.e., when inflation is relatively higher in Canada compared to the U.S.), the Canadian dollar depreciates. The coefficient for the interest rate differential is positive (0.8), which means that when the interest rate differential between the U.S. and Canada decreases (i.e., when interest rates are relatively higher in Canada compared to the U.S.), the Canadian dollar depreciates. Therefore, the best choice is C) increases; decreases.

A Regression Model Was Applied to Explain Movements in the Canadian