A regression model was applied to explain movements in the Canadian dollar's value over time. The coefficient for the inflation differential between the U.S. and Canada was -0.2. The coefficient of the interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.
A) increases; increases
B) decreases; increases
C) increases; decreases.
D) increases; decreases

Question

Quizplus · Accepted Answer

According to the given coefficients, the Canadian dollar depreciates when the inflation differential increases (implying higher inflation in Canada than in the US) and the interest rate differential decreases (implying higher interest rates in the US than in Canada). Therefore, option C is the correct answer.

A Regression Model Was Applied to Explain Movements in the Canadian