These shifts are somewhat offsetting. B. Thus, we can not determine the direction of Currency B's value against the dollar. Tarheel Company plans to determine how changes in U.S. and Mexican real interest rates will affect the value of the U.S. dollar. Describe a regression model that could be used to achieve this purpose. Also explain the expected sign of the regression coefficient.
Various models are possible.
Based on the model above, the regression coefficient is expected to have a negative sign. A relatively high real interest rate differential would likely cause a weaker peso value, other things being equal. An appropriate model would also include other independent variables that may influence the percentage change in the peso's value. If Tarheel Company thought that the existence of a quota in particular historical periods may have affected exchange rates, how might this be accounted for in the regression model. A dummy variable could be included in the model, assigned a value of one for periods when a quota existed and a value of zero when it did not exist.