3. Does purchasing power parity exist? In addition to testing for purchasing power party (PPP) by plotting individual points (combinations of interest rate differentials and changes in the spot rate of the foreign currency between two countries) on a graph, you can also test for PPP using regression analysis. In particular, consider the following regression model: ey = + (-1) + Where e, is the percentage change in the foreign currency value. I is the inflation rate of the home currency, and I s the inflation rate of the foreign currency, do and aj are coefficients to be estimated, while is the error term. If the theory of PPP were true, what would be the values of a, and ai?(Hint: Assume the average value of the error term is 0) O ao = 0, ai = 0 O 4 = 1, 1 = 1 O as = 1, = 0 do = 0, a = 1 Which of the following factors influence the exchange rate of a currency? Check all that apply. D Changes in relative income levels changes in relative inflation rates changes in expectations of future exchange rates Changes in government controls Changes in relative interest rates by only the changes in relative Interest rates by more than just relative indation, change rate movements Because the exchange rate for a currency is influenced predicted entirely by PPP