The following regression model was estimated to forecast the value of the Malays

Question

The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR): MYR t=a0+a1INCt-1+a2INFt-1+ut where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients a0 = .005; a1= .4; and a2= -.7. Based on the regression result, which of the following statement is correct? A. For a one-unit percentage change in the inflation differential, Malaysian ringgit is expected to change by .7% in the same direction, other things held constant. B. For a one-unit percentage change in the inflation differential, Malaysian ringgit is expected to change by .4% in the same direction, other things held constant. C. For a one-unit percentage change in the inflation differential, Malaysian ringgit is expected to change by .4% in the opposite direction, other things held constant. D. For a one-unit percentage change in the inflation differential, Malaysian ringgit is expected to change by .7% in the opposite direction, other things held constant. E. none of the above is correct

Explanation / Answer

Solution:

Regression equation is

MYR t=a0+a1 * INCt-1 + a2 8 INFt-1+ut

Coefficient a0 = 0.005, a1 = 0.4, a2= -0.7

INC =  previous quarterly percentage change in the income growth differential

INF= previous quarterly percentage change in the inflation differential,

Now considering each option

A. For a one-unit percentage change in the inflation differential, Malaysian ringgit is expected to change by .7% in the same direction, other things held constant

Answer: Coefficient related with inflation is a2 and its value is -0.7. That means the positive change in inflation will lead to negative change in Malaysian Riggitso this statement is incorrect

B. For a one-unit percentage change in the inflation differential, Malaysian ringgit is expected to change by .4% in the same direction, other things held constant.

Ans: This statement is incorrect as coefficient is -0.7

C. For a one-unit percentage change in the inflation differential, Malaysian ringgit is expected to change by .4% in the opposite direction, other things held constant.

Ans: This statement is incorrect as coefficient is -0.7

D. For a one-unit percentage change in the inflation differential, Malaysian ringgit is expected to change by .7% in the opposite direction, other things held constant.

Ans: Coefficent is -0.7. That means the positive change in inflation will lead to negative change in Malaysian Riggit. So this statement is incorrect

E. none of the above is correct

So option D is correct

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.