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The following regression was conducted for the exchange rate of the Cyprus pound (CYP): Regression results indicate that a =
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Option (d) is correct. PPP underestimated the exchange rate change during the given period. The expected change in exchange rate is a0 which is 0 so there is no change. However, since a2 is 2, for every %age point change in difference between inflations rates, a 2 %age point change in exchange rate should have been there.

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