Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is −.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?
a. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable.
b. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate.
c. The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate.
d. The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.
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