l. (a) (b) Empirically, the uncovered interest parity (UIP) condition is often tested by running the following regression: A'3t+1 = a + 30% 3t) + Et+1 where at is the natural logarithm of the spot exchange rate at time t, Aet+1 = et+1 et, ft is the natural logarithm of the forward exchange rate at time t for delivery at time t + 1, a: and B are parameters to be estimated, and EH1 is the disturbance term. Discuss the potential problems with interpreting the results from such a regression. [60 marks] Let q denote the real exchange rate and qt the value of q at time t. Suppose that you have run the following regression using annual data, '12: = \"+BQt1 +5: and found the estimated value of B to be 0.85. Explain whether and to what extent this result supports or rejects the empirical validity of the purchasing power parity (PPP) hypothesis. [40 marks]