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_t R² = 0.85

(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