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:
Yt= 6.682 – 4.318Xt R2 = 0.528
se= (1.22) (1.333)
(ii) Interpret this regression. How would you interpret intercept coefficient?
(iii) Does the negative value of Xt make economic sense?
(iv) 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?
