Fromthe annual observations from 1980 to 1994, the following regressionresults were obtained, where Y = exchange rate of the German mark tothe U.S. dollar (GM/$) and X = ratio of the U.S. consumer price indexto the German consumer price index; that is, X represents the relativeprices in the two countries:ˆYt = 6.682 – 4.318Xt r 2 = 0.528se = (1.22)(1.333)a. Interpret this regression. How would you interpret r 2?b. Does the negative value of Xt make economic sense? What is the underlyingeconomic 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?3.20.
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