Does the negative value of xt make economic sense

Reference no: EM131243715

The relationship between nominal exchange rate and relative prices. From the annual observations from 1980 to 1994, the following regression results were obtained, where Y = exchange rate of the German mark to the U.S. dollar (GM/$) and X = ratio of the U.S. consumer price index to the German consumer price index; that is, X represents the relative prices in the two countries:

a. Interpret this regression. How would you interpret r₂?

b. Does the negative value of X_t make economic sense? What is the underlying economic theory?

c. Suppose we were to redefine X as the ratio of German CPI to the U.S. CPI. Would that change the sign of X? And why?

Reference no: EM131243715

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