Question
The following regression model was estimated to forecast the value of the Indian rupee (INR): INRt =a0 +a1INTt +a2INFt1 +t, where INR is the quarterly
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The following regression model was estimated to forecast the value of the Indian rupee (INR):
INRt =a0 +a1INTt +a2INFt1 +t,
where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = .5; and a2 = .8. Assume that INFt 1 = 2%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:
Probability Possible Outcome
30% -2%
40% -3%
30% -4%
Find the expected change in the Indian rupee in period t
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