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7. Exchange rate forecasting: Fundamental forecasting Chance Co., the parent of a US-based company, uses fundamental forecasting to estimate future values of exchange rates. Suppose that Hiliard Co. believes that movements in the value of the British pound (as measured by percentage change from the previous quarter), W, are dictated entirely by the inflation rate differential between the pound and the U.S. dollar in the previous quarter Inf,.. That is, the firm uses the following regression equation in its analysis: cep=b0+b1lnf11+1 , where , is the error term and b0 is a constant. Suppese that Chance Co. estimates b0 to be 0.0 and b1 to be 0.7 . According to these estimates, which of the following is associated with a one-unt increase in Iff, ? A decrease in the value of the pound by 0.7 percent An increase in the value of the pound by 0.7 percent A decrease in the value of the pound by 0.3 percent An increase in the value of the pound by 0.3 percent Suppose that U.S. Infation increased more than the U.K. Inhation rate and that the Inflation rate differential between the U.K. and U.S. in the previous qubrter was 2. According to the estimated regression equation, the value of the pound wit 1.30 percent 1.40 percent 2.70 percent 2.86 percent

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