Question
11. MNC A uses a regression model to forecast the value of the euro in the upcoming period. The following regression model was developed: t
11. MNC A uses a regression model to forecast the value of the euro in the upcoming period. The following regression model was developed: t = b0 + b1INFt-1 + b2INCt-1, where the two variables are the percentage change in the inflation differential between the U.S. and Europe and the quarterly percentage change in the income growth differential between the U.S. and Europe, respectively. The coefficients for the regression model are: b0 = 0.005, b1 = 0.9, and b2 = 0.7. In the most recent quarterly, U.S. inflation increased by 1%, while European inflation increased by 2%. Also in the most recent quarter, U.S. income growth increased by 1.5%, while European income growth increased by 2%. Based on this information, what is the expected change in the euro?
a. 0.75% appreciation
b. 0.75% depreciation
c. 1.05% appreciation
d. 0.05% depreciation
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