3. Does purchasing power parity exist? In addition to testing for purchasing power parity (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: 1+1 ef = ao +a1 | Where ef is the percentage change in the foreign currency value, In is the inflation rate of the home currency, and If is the inflation rate of the foreign currency. ao and a1 are coefficients to be estimated, while u is the error term. If the theory of PPP were true, what would be the values of ao and aj ?(Hint: Assume the average value of the error term is 0.) ao = 1, a1 = 1 O ao = 0, a1 = 0 ao = 0, a1 = 1 O ao = 1, a1 = 0 Which of the following factors influence the exchange rate of a currency? Check all that apply. O Changes in expectations of future exchange rates inflation rates

In addition to testing for purchasing power parity (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: edota (-1) + Where e/ is the percentage change in the foreign currency value, I is the inflation rate of the home currency, and I the inflation rate of the foreign currency. d, and an are coefficients to be estimated, while is the error term If the theory of ppp were true, what would be the values of de and a (Hint: Assume the average value of the error term is o.) O d. - 1.1 -0,1 - 0 Od 0,6 = 1 Od = 1= 0 Which of the following foctors innuence the exchange rate of a currency? Check all that apply Changes in expectations of future exchange rates If the theory of PPP were true, what would be the values of an and a:7(Hint: Assume the average value of the error term is o.) do = 1, a=1 O do = 0, a; = 0 a = 0, a; = 1 do = 1, = 0 Which of the following factors influence the exchange rate of a currency? Check all that apply. B Changes in expectations of future exchange rates Changes in relative inflation rates Changes in relative interest rates Changes in government controls Changes in relative income levels relative inflation, exchange rate movements be Because the exchange rate for a currency is influenced predicted entirely by PPP