Chance Co., the parent of a US-based MNC, uses fundamental forecasting to estimate future values of exchange rates.

Suppose that Chance Co. believes that movements in the value of the British (as measured by percentage change from the previous quarter), ebpebp, pound are dictated entirely by the inflation rate differential between the pound and the U.S. dollar in the previous quarter Inft-1Inft-1. That is, the firm uses the following regression equation:

ebp=b0+b1Inft-1+t

Where tt is the error term and b0b0 is a constant.

Suppose that Chance Co. estimates b0b0 to be 0.0 and b1b1 to be 0.6.

According to these estimates, which of the following is associated with a one unit increase in Inft-1Inft-1?

An increase in the value of the pound by 0.4 percent

A decrease in the value of the pound by 0.4 percent

A decrease in the value of the pound by 0.6 percent

An increase in the value of the pound by 0.6 percent

Suppose the inflation rate differential between the U.K. and the U.S. in the previous quarter was 5 percent.

According to the estimated regression equation, which of the following is closest to the estimated percentage change in the value of the pound?

8.3333

3

5.6

4.4