Purchasing power parity (PPP) implies that exchange rate movements should mirror relative price movements between countries in the long run. PPP holds if exchange rate or relative prices adjust negatively to deviations between exchange rates and relative prices. Using 147 annual observations between the U.S. and the U.K. from 1871 to 2017, recent research finds an adjustment of -0.19 with a sample standard deviation of 0.692. a) Based on the research evidence, test if PPP holds at a 3% significance level. Please show the full workings and justify the decision. b) 1%, 5% or 10% levels of significance are only conventional levels of significance. Illustrate how the level of significance is a choice and could vary across contexts.

Purchasing power parity (PPP) implies that exchange rate movements should mirror relative price movements between countries in the long run. PPP holds if exchange rate or relative prices adjust negatively to deviations between exchange rates and relative prices. Using 147 annual observations between the U.S. and the U.K. from 1871 to 2017, recent research finds an adjustment of -0.19 with a sample standard deviation of 0.692. a) Based on the research evidence, test if PPP holds at a 3% significance level. Please show the full workings and justify the decision. b) 1%, 5% or 10% levels of significance are only conventional levels of significance. Illustrate how the level of significance is a choice and could vary across contexts.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter5: Business And Economic Forecasting

Section: Chapter Questions

Problem 3E: Metropolitan Hospital has estimated its average monthly bed needs as N=1,000+9X where...

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