The relationship between nominal exchange rate and relative prices. From the annual observations from 1980 to 1994, the following regression results were obtained, where Y = exchange rate of the German mark to the U.S. dollar (GM/$) and X = ratio of the U.S. consumer price index to the German consumer price index; that is, X represents the relative prices in the two countries:
![255_cdb4488f-3068-4450-b029-9f8fd51beca7.png](https://secure.tutorsglobe.com/CMSImages/255_cdb4488f-3068-4450-b029-9f8fd51beca7.png)
a. Interpret this regression. How would you interpret r2?
b. Does the negative value of Xt make economic sense? What is the underlying economic 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?