2.Assume that the following regression model was applied to historical quarterly data:

e_t= a₀+ a₁INT_t+ a₂INF_t+ _t

where e_t=percentage change in the exchange rate of the Japanese yen in period t

INT_t=average real interest rate differential (U.S. interest rate - Japanese interest rate) over period t

INF_t=inflation differential (U.S. inflation rate - Japanese inflation rate) in period t

a₀, a₁, a₂=regression coefficients

_t=error term

Thus, the estimated regression equation is as follows:

^

e_t= 0.001 + 0.90 INT_t+ 0.80 INF_tR² = 0.85

(0.01)(0.02)(0.30)

Please answer the questions below.

a.If the real interest rate differential was 2%, predict the change in the exchange rate. Which assumption are you making?

b.If the inflation differential was 1%, predict the change in the exchange rate. Which assumption are you making?

c.If the real interest and inflation rate differentials were 1% and 2% respectively, predict the change in the exchange rate

d.What is the meaning of the R-squared?

e.Finally, determine which regression coefficients are statistically significant