Quiz TH

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Chapter 1

1. Econometrics is the branch of economics that _____.


a. studies the behavior of individual economic agents in making economic decisions
b. develops and uses statistical methods for estimating economic relationships
c. deals with the performance, structure, behavior, and decision-making of an
economy as a whole
d. applies mathematical methods to represent economic theories and solve
economic problems.
2. Nonexperimental data is called _____.
a. cross-sectional data
b. time series data
c. observational data
d. panel data
3. Which of the following is true of experimental data?
a. Experimental data are collected in laboratory environments in the natural
sciences.
b. Experimental data cannot be collected in a controlled environment.
c. Experimental data is sometimes called observational data.
d. Experimental data is sometimes called retrospective data.
4. An empirical analysis relies on _____to test a theory.
a. common sense
b. ethical considerations
c. data
d. customs and conventions
5. The term ‘u’ in an econometric model is usually referred to as the _____.
a. error term
b. parameter
c. hypothesis
d. dependent variable
6. The parameters of an econometric model _____.
a. include all unobserved factors affecting the variable being studied
b. describe the strength of the relationship between the variable under study and
the factors affecting it
c. refer to the explanatory variables included in the model
d. refer to the predictions that can be made using the model
7. Which of the following is the first step in empirical economic analysis?
a. Collection of data
b. Statement of hypotheses
c. Specification of an econometric model
d. Testing of hypotheses
8. A data set that consists of a sample of individuals, households, firms, cities,
states, countries, or a variety of other units, taken at a given point in time, is
called a(n) _____.
a. cross-sectional data set
b. longitudinal data set
c. time series data set
d. experimental data set
9. Data on the income of law graduates collected at different times during the
same year is_____.
a. panel data
b. experimental data
c. time series data
d. cross-sectional data
10. A data set that consists of observations on a variable or several variables
over time is called a _____ data set.
a. binary
b. cross-sectional
c. time series
d. experimental
11. Which of the following is an example of time series data?
a. Data on the unemployment rates in different parts of a country during a year.
b. Data on the consumption of wheat by 200 households during a year.
c. Data on the gross domestic product of a country over a period of 10 years.
d. Data on the number of vacancies in various departments of an organization on a
particular month.
12. Which of the following refers to panel data?
a. Data on the unemployment rate in a country over a 5-year period
b. Data on the birth rate, death rate and population growth rate in developing
countries over a 10-year period.
c. Data on the income of 5 members of a family on a particular year.
d. Data on the price of a company’s share during a year.
13. Which of the following is a difference between panel and pooled cross-
sectional data?
a. A panel data set consists of data on different cross-sectional units over a given
period of time while a pooled data set consists of data on the same cross-sectional
units over a given period of time.
b. A panel data set consists of data on the same cross-sectional units over a given
period of time while a pooled data set consists of data on different cross-sectional
units over a given period of time
c. A panel data consists of data on a single variable measured at a given point in
time while a pooled data set consists of data on the same cross-sectional units over
a given period of time.
d. A panel data set consists of data on a single variable measured at a given point in
time while a pooled data set consists of data
on more than one variable at a given
point in time.
14. _____ has a causal effect on _____.
a. Income; unemployment
b. Height; health
c. Income; consumption
d. Age; wage
15. Which of the following is true?
a. A variable has a causal effect on another variable if both variables increase or
decrease simultaneously.
b. The notion of ‘ceteris paribus’ plays an important role in causal analysis.
c. Difficulty in inferring causality disappears when studying data at fairly high levels
of aggregation.
d. The problem of inferring causality arises if experimental data is used for analysis.
16. Experimental data are sometimes called retrospective data.
Answer: False
17. An economic model consists of mathematical equations that describe
various relationships between economic variables.
Answer: True
18. A cross-sectional data set consists of observations on a variable or
several variables over time.
Answer: False
19. A time series data is also called a longitudinal data set.
Answer: False
20. The notion of ceteris paribus means “other factors being equal.”
Answer: True
21. Experimental data are easy to obtain in the social sciences.
Answer: False
22. Random sampling complicates the analysis of cross-sectional data.
Answer: False
23. Which of the following terms measures the association between two
variables?
a. Correlation
b. Casual effect
c. Average
d. Independent
24. The constant of economic models are referred to as…
a. error terms
b. parameters
c. hypotheses
d. statistics
25. Which of the following is true of time series data?
Answer: The chronological ordering of observations in a time series conveys
potentially important.

Chapter 2
1. A dependent variable is also known as a(n) _____.
a. explanatory variable
b. control variable
c. predictor variable
d. response variable
2. If a change in variable x causes a change in variable y, variable x is called
the _____.
a. dependent variable
b. explained variable
c. explanatory variable
d. response variable
3. In the equation y = β0 + β1x + u, β0 is the _____.
a. dependent variable
b. independent variable
c. slope parameter
d. intercept parameter
4. In the equation y = β0 +β1x + u, what is the estimated value of β0?

5. In the equation c = β0 + β1i + u, c denotes consumption and i denotes


income. What is the residual for the 5 observation if c5=$500 and ^c5=$475?
th

a. $975
b. $300
c. $25
d. $50
6. What does the equation ^y=^β0+^β1x denote if the regression equation is y
= β0+β1x1 + u?
a. The explained sum of squares
b. The total sum of squares
c. The sample regression function
d. The population regression function
7. Consider the following regression model: y = β0 + β1x1 + u. Which of the
following is a property of Ordinary Least Square (OLS) estimates of this model
and their associated statistics?
a. The sum, and therefore the sample average of the OLS residuals, is positive.
b. The sum of the OLS residuals is negative.
c. The sample covariance between the regressors and the OLS residuals is positive.
d. The point ( ́x, ́y) always lies on the OLS regression line

8. The explained sum of squares for the regression function, yi=β0+β1x1+u1, is


defined as _____.
a.∑i=1n(yi− ́y)2
b.∑i=1n(yi−^y)2
c.∑i=1n^ui
d.∑i=1n(ui)2
9. If the total sum of squares (SST) in a regression equation is 81, and the
residual sum of squares (SSR) is 25, what is the explained sum of squares
(SSE)?
a. 64
b. 56
c. 32
d. 18
10. If the residual sum of squares (SSR) in a regression analysis is 66 and the
total sum of squares (SST) is equal to 90, what is the value of the coefficient of
determination?
a. 0.73
b. 0.55
c. 0.27
d. 1.2
11. Which of the following is a nonlinear regression model?
a. y = β0 + β1x1/2 + u
b. log y = β0 + β1log x +u
c. y = 1 / (β0 + β1x) + u
d. y = β0 + β1x + u
12. Which of the following is assumed for establishing the unbiasedness of
Ordinary Least Square (OLS) estimates?
a. The error term has an expected value of 1 given any value of the explanatory
variable.
b. The regression equation is linear in the explained and explanatory variables.
c. The sample outcomes on the explanatory variable are all the same value.
d. The error term has the same variance given any value of the explanatory
variable.
13. The error term in a regression equation is said to exhibit homoskedasticty
if _____.
a. it has zero conditional mean
b. it has the same variance for all values of the explanatory variable.
c. it has the same value for all values of the explanatory variable
d. if the error term has a value of one given any value of the explanatory variable.
14. In the regression of y on x, the error term exhibits heteroskedasticity if
_____.
a. it has a constant variance
b. Var(y|x) is a function of x
c. x is a function of y
d. y is a function of x
15. What is the estimated value of the slope parameter when the regression
equation, y = β0 + β1x1 + u passes through the origin?

16. A natural measure of the association between two random variables is the
correlation coefficient.
Answer: True
17. The sample covariance between the regressors and the Ordinary Least
Square (OLS) residuals is always positive.
Answer: False
18. R is the ratio of the explained variation compared to the total variation.
2

Answer: True
19. There are n-1 degrees of freedom in Ordinary Least Square residuals.
Answer: False
20. The variance of the slope estimator increases as the error variance
decreases.
Answer: False
21.7. If xi and yi are positively correlated in the sample then the estimated
slope is….
a. less than zero
b. greater than zero
c. equal to zero
d. equal to one
22.8 The sample correlation between xi and yi is denoted by…
a. B^1
b.
c.
d. p^xy
23.14. In a regression equation, changing the units of measurement of only the
independent variable does not effect the…
a. dependent variable
b. slope
c. intercept
d. error term
24.20. Simple regression is an analysis of correlation between two variables.
Answer: True
25.25. In general, the constant that produces the smallest sum of squared
deviations is always the sample average.
Answer: True

Chapter 3
1. In the equation, y=β0+β1x1+β2x2+u, β2 is a(n) _____.
a. independent variable
b. dependent variable
c. slope parameter
d. intercept parameter
2. Consider the following regression equation: y=β1+β2x1+β2x2+u. What does
β1 imply?
a. β1 measures the ceteris paribus effect of x1 on x2.
b. β1 measures the ceteris paribus effect of y on x1.
c. β1 measures the ceteris paribus effect of x1 on y.
d. β1 measures the ceteris paribus effect of x1 on u.
3. If the explained sum of squares is 35 and the total sum of squares is 49,
what is the residual sum of squares?
a. 10
b. 12
c. 18
d. 14
4. Which of the following is true of R ?
2

a. R2 is also called the standard error of regression.


b. A low R2 indicates that the Ordinary Least Squares line fits the data well.
c. R2 usually decreases with an increase in the number of independent variables in a
regression.
d. R2 shows what percentage of the total variation in the dependent variable, Y, is
explained by the explanatory variables.
5. The value of R2 always _____.
a. lies below 0
b. lies above 1
c. lies between 0 and 1
d. lies between 1 and 1.5
6. If an independent variable in a multiple linear regression model is an exact
linear combination of other independent variables, the model suffers from the
problem of _____.
a. perfect collinearity
b. homoskedasticity
c. heteroskedasticty
d. omitted variable bias
7. The assumption that there are no exact linear relationships among the
independent variables in a multiple linear regression model fails if _____,
where n is the sample size and k is the number of parameters.
a. n>2
b. n=k+1
c. n>k
d. n<k+1
8. Exclusion of a relevant variable from a multiple linear regression model
leads to the problem of _____.
a. misspecification of the model
b. multicollinearity
c. perfect collinearity
d. homoskedasticity
9. Suppose the variable x2 has been omitted from the following regression
equation, y=β0+β1x1+β2x2+u. ~β1 is the estimator obtained when x2 is omitted
from the equation. The bias in ~β1 is positive if _____.
a.β2 >0 and x 1 and x 2 are positively correlated
b.β2 <0 and x 1 and x 2 are positively correlated
c.β2 >0 and x 1 and x 2 are negatively correlated
d.β2 = 0 and x 1 and x 2 are negatively correlated
10. Suppose the variable x2 has been omitted from the following regression
equation, y=β0+β1x1+β2x2+u. ~β1 is the estimator obtained when x2 is omitted
from the equation. The bias in ~β1 is negative if _____.
a. β2 >0 and x 1 and x 2 are positively correlated
b. β2 <0 and x 1 and x 2 are positively correlated
c. β2 =0 and x 1 and x 2 are negatively correlated
d. β2 =0 and x 1 and x 2 are negatively correlated
11. Suppose the variable x2 has been omitted from the following regression
equation, y=β0+β1x1+β2x2+u. ~β1 is the estimator obtained when x2 is omitted
from the equation. If E(~β1) >β1, ~β1 is said to _____.
a. have an upward bias
b. have a downward bias
c. be unbiased
d. be biased toward zero
12. High (but not perfect) correlation between two or more independent
variables is called _____.
a. heteroskedasticty
b. homoskedasticty
c. multicollinearity
d. micronumerosity
13. The term _____ refers to the problem of small sample size.
a. micronumerosity
b. multicollinearity
c. homoskedasticity
d. heteroskedasticity
14. Find the degrees of freedom in a regression model that has 10
observations and 7 independent variables.
a. 17
b. 2
c. 3
d. 4
15. The Gauss-Markov theorem will not hold if _____.
a. the error term has the same variance given any values of the explanatory
variables
b. the error term has an expected value of zero given any values of the independent
variables
c. the independent variables have exact linear relationships among them
d. the regression model relies on the method of random sampling for collection of
data
16. The term “linear” in a multiple linear regression model means that the
equation is linear in parameters.
Answer: True
17. The key assumption for the general multiple regression model is that all
factors in the unobserved error term be correlated with the explanatory
variables.
Answer: False
18. The coefficient of determination (R2) decreases when an independent
variable is added to a multiple regression model.
Answer: False
19. An explanatory variable is said to be exogenous if it is correlated with the
error term.
Answer: False
20. A larger error variance makes it difficult to estimate the partial effect of any
of the independent variables on the dependent variable.
Answer: True
21.3. In econometrics, the general partialling out result is usually called the…
a. Gauss-Markov assumption
b. Best linear unbiased estimator
c. Frisch-Waugh theorem
d. Gauss-Markov theorem

22. 15 ignores the error variance increase because it treats


both regressors as…
a. random
b. nonrandom
c. independent
d. dependent
23.22. If two regressions use different sets of observations, then we can tell
how the R-squareds will compare, even if one regression uses a subset of
regressors.
Answer: False
24.25. When one randomly samples from a population, the total sample
variation in xj decreases without bound as the sample size increases.
Answer: False
25. BLUE

Chapter 4
1. The normality assumption implies that:
a. the population error u is dependent on the explanatory variables and is normally
distributed with mean equal to one and variance σ 2.
b. the population error u is independent of the explanatory variables and is normally
distributed with mean equal to one and variance σ.
c. the population error u is dependent on the explanatory variables and is normally
distributed with mean zero and variance σ.
d. the population error u is independent of the explanatory variables and is normally
distributed with mean zero and variance σ2.
2. Which of the following statements is true?
a. Taking a log of a nonnormal distribution yields a distribution that is closer to
normal.
b. The mean of a nonnormal distribution is 0 and the variance is σ2.
c. The CLT assumes that the dependent variable is unaffected by unobserved
factors.
d. OLS estimators have the highest variance among unbiased estimators.
3. A normal variable is standardized by:
a. subtracting off its mean from it and multiplying by its standard deviation.
b. adding its mean to it and multiplying by its standard deviation.
c. subtracting off its mean from it and dividing by its standard deviation.
d. adding its mean to it and dividing by its standard deviation.
4. Which of the following is a statistic that can be used to test hypotheses
about a single population parameter?
a. F statistic
b. t statistic
c. χ2 statistic
d. Durbin Watson statistic
5. Consider the equation, Y = β1 + β2X2 + u. A null hypothesis, H0: β2 = 0 states
that:
a. X2 has no effect on the expected value of β2.
b. X2 has no effect on the expected value of Y.
c. β2 has no effect on the expected value of Y.
d. Y has no effect on the expected value of X2.
6. The significance level of a test is:
a. the probability of rejecting the null hypothesis when it is false.
b. one minus the probability of rejecting the null hypothesis when it is false.
c. the probability of rejecting the null hypothesis when it is true.
d. one minus the probability of rejecting the null hypothesis when it is true.
7. The general t statistic can be written as:
8. Which of the following statements is true of confidence intervals?
a. Confidence intervals in a CLM are also referred to as point estimates.
b. Confidence intervals in a CLM provide a range of likely values for the population
parameter.
c. Confidence intervals in a CLM do not depend on the degrees of freedom of a
distribution.
d. Confidence intervals in a CLM can be truly estimated when heteroskedasticity is
present.
9. Which of the following statements is true?
a. When the standard error of an estimate increases, the confidence interval for the
estimate narrows down.
b. Standard error of an estimate does not affect the confidence interval for the
estimate.
c. The lower bound of the confidence interval for a regression coefficient, say βj, is
given by ^βJ - [standard error × (^βJ)]
d. The upper bound of the confidence interval for a regression coefficient, say β j, is
given by ^βJ + [Critical value × standard error (^βJ)]

10. Which of the following tools is used to test multiple linear restrictions?
a. t test
b. z test
c. F test
d. Unit root test
11. Which of the following statements is true of hypothesis testing?
a. The t test can be used to test multiple linear restrictions.
b. A test of single restriction is also referred to as a joint hypotheses test.
c. A restricted model will always have fewer parameters than its unrestricted model.
d. OLS estimates maximize the sum of squared residuals.
12. Which of the following correctly defines F statistic if SSR r represents sum
of squared residuals from the restricted model of hypothesis testing, SSR ur
represents sum of squared residuals of the unrestricted model, and q is the
number of restrictions placed?

13. Which of the following statements is true?


a. If the calculated value of F statistic is higher than the critical value, we reject the
alternative hypothesis in favor of the null hypothesis.
b. The F statistic is always nonnegative as SSRr is never smaller than SSRur.
c. Degrees of freedom of a restricted model is always less than the degrees of
freedom of an unrestricted model.
d. The F statistic is more flexible than the t statistic to test a hypothesis with a single
restriction.
14. If R2ur = 0.6873, R2r = 0.5377, number of restrictions = 3, and n – k – 1 = 229,
F statistic equals:
a. 21.2
b. 28.6
c. 36.5
d. 42.1
15. Which of the following correctly identifies a reason why some authors
prefer to report the standard errors rather than the t statistic?
a. Having standard errors makes it easier to compute confidence intervals.
b. Standard errors are always positive.
c. The F statistic can be reported just by looking at the standard errors.
d. Standard errors can be used directly to test multiple linear regressions.
16. Whenever the dependent variable takes on just a few values it is close to a
normal distribution.
Answer: False
17. If the calculated value of the t statistic is greater than the critical value, the
null hypothesis, H0 is rejected in favor of the alternative hypothesis, H1.
Answer: True
18. H1: βj ≠ 0, where βj is a regression coefficient associated with an
explanatory variable, represents a one-sided alternative hypothesis.
Answer: False
19. If^β1 and ^β2 are estimated values of regression coefficients associated
with two explanatory variables in a regression equation, then the standard
error (^β1 –^β2) = tandard error (^β1) – standard error (^β2).
Answer: False
20. Standard errors must always be positive.
Answer: True
21. The ordinary least square estimators have the smallest variance among all
the unbiased estimators.
Answer: True
22. Which of the following is true of confidence intervals?
Answer: Confidence intervals are also called interval estimates
23. The population parameter in the null hypothesis…
Answer: is not always equal to zero
24. In regression analysis, the standard errors should not always be included
along with the estimated coefficients.
Answer: False

Chapter 5
1. Which of the following statements is true?
a. The standard error of a regression, ^σ, is not an unbiased estimator for σ, the
standard deviation of the error, u, in a multiple regression model.
b. In time series regressions, OLS estimators are always unbiased.
c. Almost all economists agree that unbiasedness is a minimal requirement for an
estimator in regression analysis.
d. All estimators in a regression model that are consistent are also unbiased.
2. If ^βj, an unbiased estimator of βj, is consistent, then the:
a. distribution of ^βj becomes more and more loosely distributed around βj as the
sample size grows.
b. distribution of ^βj becomes more and more tightly distributed around βj as the
sample size grows.
c. distribution of ^βj tends toward a standard normal distribution as the sample size
grows.
d. distribution of ^βj remains unaffected as the sample size grows.
3. If ^βj, an unbiased estimator of βj, is also a consistent estimator of βj, then
when the sample size tends to infinity:
a. the distribution of ^βj collapses to a single value of zero.
b. the distribution of ^βj diverges away from a single value of zero.
c. the distribution of ^βj collapses to the single point βj.
d. the distribution of ^βj diverges away from βj.
4. In a multiple regression model, the OLS estimator is consistent if:
a. there is no correlation between the dependent variables and the error term.
b. there is a perfect correlation between the dependent variables and the error
term.
c. the sample size is less than the number of parameters in the model.
d. there is no correlation between the independent variables and the error term.
5. If the error term is correlated with any of the independent variables, the OLS
estimators are:
a. biased and consistent.
b. unbiased and inconsistent.
c. biased and inconsistent.
d. unbiased and consistent.
6. If δ1 = Cov(x1/x2) / Var(x1) where x1 and x2 are two independent variables in a
regression equation, which of the following statements is true?
a. If x2 has a positive partial effect on the dependent variable, and δ 1 > 0, then the
inconsistency in the simple regression slope estimator associated with x 1 is negative.
b. If x2 has a positive partial effect on the dependent variable, and δ 1 > 0, then the
inconsistency in the simple regression slope estimator associated with x 1 is positive.
c. If x1 has a positive partial effect on the dependent variable, and δ 1 > 0, then the
inconsistency in the simple regression slope estimator associated with x1 is negative.
d. If x1 has a positive partial effect on the dependent variable, and δ 1 > 0, then the
inconsistency in the simple regression slope estimator associated with x 1 is positive.
7. If OLS estimators satisfy asymptotic normality, it implies that:
a. they are approximately normally distributed in large enough sample sizes.
b. they are approximately normally distributed in samples with less than 10
observations.
c. they have a constant mean equal to zero and variance equal to σ 2.
d. they have a constant mean equal to one and variance equal to σ.

8. In a regression model, if variance of the dependent variable, y, conditional


on an explanatory variable, x, or Var(y|x), is not constant, _____.
a. the t statistics are invalid and confidence intervals are valid for small sample sizes
b. the t statistics are valid and confidence intervals are invalid for small sample sizes
c. the t statistics confidence intervals are valid no matter how large the sample size
is
d. the t statistics and confidence intervals are both invalid no matter how large the
sample size is
9. If ^βj is an OLS estimator of a regression coefficient associated with one of
the explanatory variables, such that j= 1, 2, ...., n, asymptotic standard error of
^βj will refer to the:
a. estimated variance of ^βj when the error term is normally distributed.
b. estimated variance of a given coefficient when the error term is not normally
distributed.
c. square root of the estimated variance of ^βj when the error term is normally
distributed.
d. square root of the estimated variance of ^βj when the error term is not normally
distributed.
10. A useful rule of thumb is that standard errors are expected to shrink at a
rate that is the inverse of the:
a. square root of the sample size.
b. product of the sample size and the number of parameters in the model.
c. square of the sample size.
d. sum of the sample size and the number of parameters in the model.
11. An auxiliary regression refers to a regression that is used:
a. when the dependent variables are qualitative in nature.
b. when the independent variables are qualitative in nature.
c. to compute a test statistic but whose coefficients are not of direct interest.
d. to compute coefficients which are of direct interest in the analysis.
12. The n-R-squared statistic also refers to the:
a. F statistic.
b. t statistic.
c. z statistic.
d. LM statistic.
13. The LM statistic follows a:
a. t distribution.
b. f distribution.
c. χ2 distribution.
d. binomial distribution.
14. Which of the following statements is true?
a. In large samples there are not many discrepancies between the outcomes of the
F test and the LM test.
b. Degrees of freedom of the unrestricted model are necessary for using the LM test.
c. The LM test can be used to test hypotheses with single restrictions only and
provides inefficient results for multiple restrictions.
d. The LM statistic is derived on the basis of the normality assumption.
15. Which of the following statements is true under the Gauss-Markov
assumptions?
a. Among a certain class of estimators, OLS estimators are best linear unbiased, but
are asymptotically inefficient.
b. Among a certain class of estimators, OLS estimators are biased but
asymptotically efficient.
c. Among a certain class of estimators, OLS estimators are best linear unbiased and
asymptotically efficient.
d. The LM test is independent of the Gauss-Markov assumptions.
16. If variance of an independent variable in a regression model, say x 1, is
greater than 0, or Var(x1) > 0, the inconsistency in ^β1 (estimator associated
with x1) is negative, if x1 and the error term are positively related.
Answer: False
17. Even if the error terms in a regression equation, u1, u2,....., un, are not
normally distributed, the estimated coefficients can be normally distributed.
Answer: False
18. A normally distributed random variable is symmetrically distributed about
its mean, it can take on any positive or negative value (but with zero
probability), and more than 95% of the area under the distribution is within two
standard deviations.
Answer: True
19. The F statistic is also referred to as the score statistic.
Answer: False
20. The LM statistic requires estimation of the unrestricted model only.
Answer: False

Chapter 6
1. A change in the unit of measurement of the dependent variable in a model
does not lead to a change in:
a. the standard error of the regression.
b. the sum of squared residuals of the regression.
c. the goodness-of-fit of the regression.
d. the confidence intervals of the regression.
2. Changing the unit of measurement of any independent variable, where log
of the dependent variable appears in the regression:
a. affects only the intercept coefficient.
b. affects only the slope coefficient.
c. affects both the slope and intercept coefficients.
d. affects neither the slope nor the intercept coefficient.
3. A variable is standardized in the sample:
a. by multiplying by its mean.
b. by subtracting off its mean and multiplying by its standard deviation.
c. by subtracting off its mean and dividing by its standard deviation.
d. by multiplying by its standard deviation.
4. Standardized coefficients are also referred to as:
a. beta coefficients.
b. y coefficients.
c. alpha coefficients.
d. j coefficients.
5. If a regression equation has only one explanatory variable, say x 1, its
standardized coefficient must lie in the range:
a. -2 to 0.
b. -1 to 1.
c. 0 to 1.
d. 0 to 2.
6. In the following equation, gdp refers to gross domestic product, and FDI
refers to foreign direct investment.
log(gdp) = 2.65 + 0.527log(bankcredit) + 0.222FDI
(0.13) (0.022) (0.017)
Which of the following statements is then true?
a. If gdp increases by 1%, bank credit increases by 0.527%, the level of FDI
remaining constant.
b. If bank credit increases by 1%, gdp increases by 0.527%, the level of FDI
remaining constant.
c. If gdp increases by 1%, bank credit increases by log(0.527)%, the level of FDI
remaining constant.
d. If bank credit increases by 1%, gdp increases by log(0.527)%, the level of FDI
remaining constant.
7. In the following equation, gdp refers to gross domestic product, and FDI
refers to foreign direct investment.
log(gdp) = 2.65 + 0.527log(bankcredit) + 0.222FDI
(0.13) (0.022) (0.017)
Which of the following statements is then true?
a. If FDI increases by 1%, gdp increases by approximately 22.2%, the amount of
bank credit remaining constant.
b. If FDI increases by 1%, gdp increases by approximately 26.5%, the amount of
bank credit remaining constant.
c. If FDI increases by 1%, gdp increases by approximately 24.8%, the amount of
bank credit remaining constant.
d. If FDI increases by 1%, gdp increases by approximately 52.7%, the amount of
bank credit remaining constant.
8. Which of the following statements is true when the dependent variable, y >
0?
a. Taking log of a variable often expands its range.
b. Models using log(y) as the dependent variable will satisfy CLM assumptions more
closely than models using the level of y.
c. Taking log of variables make OLS estimates more sensitive to extreme values.
d. Taking logarithmic form of variables make the slope coefficients more responsive
to rescaling.
9. Which of the following correctly identifies a limitation of logarithmic
transformation of variables?
a. Taking log of variables make OLS estimates more sensitive to extreme values in
comparison to variables taken in level.
b. Logarithmic transformations cannot be used if a variable takes on zero or
negative values.
c. Logarithmic transformations of variables are likely to lead to heteroskedasticity.
d. Taking log of a variable often expands its range which can cause inefficient
estimates.
10. Which of the following models is used quite often to capture decreasing or
increasing marginal effects of a variable?
a. Models with logarithmic functions
b. Models with quadratic functions
c. Models with variables in level
d. Models with interaction terms
11. Which of the following correctly represents the equation for adjusted R 2?
a. ́R2 = 1 – [SSR/(n –1)]/[SST/(n+1)]
b. ́R2 = 1 – [SSR/(n –k – 1)]/[SST/(n+1)]
c. ́R2 = 1 – [SSR/(n –k – 1)]/[SST/(n – 1)]
d. ́R2 = 1 – [SSR]/[SST/(n – 1)]
12. Which of the following correctly identifies an advantage of using adjusted
R2 over R2?
a. Adjusted R2 corrects the bias in R2.
b. Adjusted R2 is easier to calculate than R2.
c. The penalty of adding new independent variables is better understood through
adjusted R2 than R2.
d. The adjusted R2 can be calculated for models having logarithmic functions while
R2 cannot be calculated for such models.
13. Two equations form a nonnested model when:
a. one is logarithmic and the other is quadratic.
b. neither equation is a special case of the other.
c. each equation has the same independent variables.
d. there is only one independent variable in both equations.
14. A predicted value of a dependent variable:
a. represents the difference between the expected value of the dependent variable
and its actual value.
b. is always equal to the actual value of the dependent variable.
c. is independent of explanatory variables and can be estimated on the basis of the
residual error term only.
d. represents the expected value of the dependent variable given particular values
for the explanatory variables.
15. Residual analysis refers to the process of:
a. examining individual observations to see whether the actual value of a
dependent variable differs from the predicted value.
b. calculating the squared sum of residuals to draw inferences for the consistency of
estimates.
c. transforming models with variables in level to logarithmic functions so as to
understand the effect of percentage changes in the independent variable on the
dependent variable.
d. sampling and collection of data in such a way to minimize the squared sum of
residuals.
16. Beta coefficients are always greater than standardized coefficients.
Answer: False
17. If a new independent variable is added to a regression equation, the
adjusted R2 increases only if the absolute value of the t statistic of the new
variable is greater than one.
Answer: True
18. F statistic can be used to test nonnested models.
Answer: False
19. Predictions of a dependent variable are subject to sampling variation.
Answer: True
20. To make predictions of logarithmic dependent variables, they first have to
be converted to their level forms.
Answer: False
21.11. One popular measure to describe the relationship between the
dependent variable y and each explanatory variable is the:
Answer: average partial effect.
22.15. An independent variable can be included in a regression model
Answer: when it affects y and is uncorrelated will all of the independent variables of
interest.
23.18. to estimate a0, then the residual for predicting yi is:

24. 20. The centering of explanatory variables about their sample averages
before creating quadratics or interactions forces the coefficient on the levels
to be average partial effects.
Answer: True
25. 22. If the R-squared value is low, then using OLS equation is very easy to
predict individual future outcomes on y given a set of values for the
explanatory variables.
Answer: False

Chapter 7
1. A _____ variable is used to incorporate qualitative information in a
regression model.
a. dependent
b. continuous
c. binomial
d. dummy
2. In a regression model, which of the following will be described using a
binary variable?
a. Whether it rained on a particular day or it did not
b. The volume of rainfall during a year
c. The percentage of humidity in air on a particular day
d. The concentration of dust particles in air
3. Which of the following is true of dummy variables?
a. A dummy variable always takes a value less than 1.
b. A dummy variable always takes a value higher than 1.
c. A dummy variable takes a value of 0 or 1.
d. A dummy variable takes a value of 1 or 10.
4. Refer to the model above. The inclusion of another binary variable in this
model that takes a value of 1 if a person is uneducated, will give rise to the
problem of _____.
a. omitted variable bias
b. self-selection
c. dummy variable trap
d. heteroskedastcity
5. Refer to the model above. The benchmark group in this model is _____.
a. the group of educated people
b. the group of uneducated people
c. the group of individuals with a high income
d. the group of individuals with a low income
6. Refer to the above model. If ∂0 > 0, _____.
a. uneducated people have higher savings than those who are educated
b. educated people have higher savings than those who are not educated
c. individuals with lower income have higher savings
d. individual with lower income have higher savings
7. The income of an individual in Budopia depends on his ethnicity and
several other factors which can be measured quantitatively. If there are 5
ethnic groups in Budopia, how many dummy variables should be included in
the regression equation for income determination in Budopia?
a. 1
b. 5
c. 6
d. 4
8. The quarterly increase in an employee’s salary depends on the rating of his
work by his employer and several other factors as shown in the model below:
Increase in salary= β0+∂0Rating + other factors. The variable ‘Rating’ is a(n)
_____ variable.
a. dependent variable
b. ordinal variable
c. continuous variable
d. Poisson variable
9. Which of the following is true of Chow test?
a. It is a type of t test.
b. It is a type of sign test.
c. It is only valid under homoskedasticty.
d. It is only valid under heteroskedasticity.
10. Which of the following is true of dependent variables?
a. A dependent variable can only have a numerical value.
b. A dependent variable cannot have more than 2 values.
c. A dependent variable can be binary.
d. A dependent variable cannot have a qualitative meaning.
11. In the following regression equation, y is a binary variable:
y= β0+β1x1+...βk xk+ u
In this case, the estimated slope coefficient, ^β1 measures _____.
a. the predicted change in the value of y when x 1 increases by one unit, everything
else remaining constant
b. the predicted change in the value of y when x 1 decreases by one unit, everything
else remaining constant
c. the predicted change in the probability of success when x 1 decreases by one unit,
everything else remaining constant
d. the predicted change in the probability of success when x 1 increases by one unit,
everything else remaining constant
12. Consider the following regression equation: y = β 0+β1x1+...βk xk+ u
In which of the following cases, the dependent variable is binary?
a. y indicates the gross domestic product of a country
b. y indicates whether an adult is a college dropout
c. y indicates household consumption expenditure
d. y indicates the number of children in a family
Answer: b
13. Which of the following Gauss-Markov assumptions is violated by the linear
probability model?
a. The assumption of constant variance of the error term.
b. The assumption of zero conditional mean of the error term.
c. The assumption of no exact linear relationship among independent variables.
d. The assumption that none of the independent variables are constants.
14. Which of the following problems can arise in policy analysis and program
evaluation using a multiple linear regression model?
a. There exists homoscedasticity in the model.
b. The model can produce predicted probabilities that are less than zero and greater
than one.
c. The model leads to the omitted variable bias as only two independent factors can
be included in the model.
d. The model leads to an overestimation of the effect of independent variables on
the dependent variable.
15. Consider the following regression equation: y = β 0+β1x1+...βk xk+ u
In which of the following cases, is ‘y’ a discrete variable?
a. y indicates the gross domestic product of a country
b. y indicates the total volume of rainfall during a year
c. y indicates household consumption expenditure
d. y indicates the number of children in a family
16. A binary variable is a variable whose value changes with a change in the
number of observations.
Answer: False
17. A dummy variable trap arises when a single dummy variable describes a
given number of groups.
Answer: False
18. The dummy variable coefficient for a particular group represents the
estimated difference in intercepts between that group and the base group.
Answer: True
19. The multiple linear regression model with a binary dependent variable is
called the linear probability model.
Answer: True
20. A problem that often arises in policy and program evaluation is that
individuals (or firms or cities) choose whether or not to participate in certain
behaviors or programs.
Answer: True
21. 8. The sum of squared residuals form of the F statistic can be computed
easily even when many independent variables are involved; this particular F
statistic is usually called the _____ in econometrics.
a. Chow statistic
b. t statistic
c. statistic
d. LM statistic
22. 16. In a self-selection problem, the explanatory variables can be:
a. endogenous.
b. exogenous.
c. independent.
d.random.
23. 17. A binary response is the most extreme form of a discrete random
variable that takes on:
a. only two values, zero and one.
b. only one value, zero.
c. only one value, one.
d. any value.
24. 20. If the p-value of an F statistic 2.63 is 0.034, then we can say that the
problem of interest is significant at the 5% level.
a. True
b. False
25. 25. The parameters in a linear probability model can be interpreted as
measuring the change in the probability that y = 1 due to a one-unit increase in
an explanatory variable.
a. True
b. False

Chapter 8
1. Which of the following is true of heteroskedasticity?
a. Heteroskedasticty causes inconsistency in the Ordinary Least Squares
estimators.
b. Population R2 is affected by the presence of heteroskedasticty.
c. The Ordinary Least Square estimators are not the best linear unbiased estimators
if heteroskedasticity is present.
d. It is not possible to obtain F statistics that are robust to heteroskedasticity of an
unknown form.
2. Consider the following regression model: yi=β0+β1 xi+ui. If the first four
Gauss-Markov assumptions hold true, and the error term contains
heteroskedasticity, then
_____.
a. Var(ui|xi) =0
b. Var(ui|xi) =1
c. Var(ui|xi) = σi2
d. Var(ui|xi) =σ
3. The general form of the t statistic is _____.

4. Which of the following is true of the OLS t statistics?


a. The heteroskedasticity-robust t statistics are justified only if the sample size is
large.
b. The heteroskedasticty-robust t statistics are justified only if the sample size is
small.
c. The usual t statistics do not have exact t distributions if the sample size is large.
d. In the presence of homoscedasticity, the usual t statistics do not have exact t
distributions if the sample size is small.
5. The heteroskedasticity-robust _____ is also called the heteroskedastcity-
robust Wald statistic.
a. t statistic
b. F statistic
c. LM statistic
d. z statistic

6. The square root of the quantity is called the … for Bj.


a. heteroskedasticity-robust t statistic.
b. heteroskedasticity-robust standard error
c. heteroskedasticity-robust F statistic
d. heteroskedasticity-robust Wald statistic
7. Which of the following tests helps in the detection of heteroskedasticity?
a. The Breusch-Pagan test
b. The Breusch-Godfrey test
c. The Durbin-Watson test
d. The Chow test
8. What will you conclude about a regression model if the Breusch-Pagan test
results in a small p-value?
a. The model contains homoskedasticty.
b. The model contains heteroskedasticty.
c. The model contains dummy variables.
d. The model omits some important explanatory factors.
9. A test for heteroskedasticty can be significant if _____.
a. the Breusch-Pagan test results in a large p-value
b. the White test results in a large p-value
c. the functional form of the regression model is misspecified
d. the regression model includes too many independent variables
10. Which of the following is a difference between the White test and the
Breusch-Pagan test?
a. The White test is used for detecting heteroskedasticty in a linear regression model
while the Breusch-Pagan test is used for detecting autocorrelation.
b. The White test is used for detecting autocorrelation in a linear regression model
while the Breusch-Pagan test is used for detecting heteroskedasticity. .
c. The number of regressors used in the White test is larger than the number of
regressors used in the Breusch-Pagan test.
d. The number of regressors used in the Breusch-Pagan test is larger than the
number of regressors used in the White test.
11. Which of the following is true of the White test?
a. The White test is used to detect the presence of multicollinearity in a linear
regression model.
b. The White test cannot detect forms of heteroskedasticity that invalidate the usual
Ordinary Least Squares standard errors.
c. The White test can detect the presence of heteroskedasticty in a linear regression
model even if the functional form is misspecified.
d. The White test assumes that the square of the error term in a regression model is
uncorrelated with all the independent variables, their squares and cross products.
12. Which of the following is true?
a. In ordinary least squares estimation, each observation is given a different weight.
b. In weighted least squares estimation, each observation is given an identical
weight.
c. In weighted least squares estimation, less weight is given to observations with a
higher error variance.
d. In ordinary least squares estimation, less weight is given to observations with a
lower error variance.
13. Weighted least squares estimation is used only when _____.
a. the dependent variable in a regression model is binary
b. the independent variables in a regression model are correlated
c. the error term in a regression model has a constant variance
d. the functional form of the error variances is known
14. Consider the following regression equation: y=β0+β1x1+u.
Which of the following indicates a functional form misspecification in E(y|x)?
a. Ordinary Least Squares estimates equal Weighted Least Squares estimates.
b. Ordinary Least Squares estimates exceed Weighted Least Squares estimates by
a small magnitude.
c. Weighted Least Squares estimates exceed Ordinary Least Squares estimates by
a small magnitude.
d. Ordinary Least Square estimates are positive while Weighted Least Squares
estimates are negative.
15. Which of the following tests is used to compare the Ordinary Least
Squares (OLS) estimates and the Weighted Least Squares (WLS) estimates?
a. The White test
b. The Hausman test
c. The Durbin-Watson test
d. The Breusch-Godfrey test
16. The generalized least square (GLS) is an efficient procedure that weights
each squared residual by the:
a. conditional variance of ui given xi
b. expected value of ui given xi
c. inverse of the conditional variance of ui given xi
d. square root of the inverse of the conditional variance of ui given xi
17. The linear probability model contains heteroskedasticity unless _____.
a. the intercept parameter is zero
b. all the slope parameters are positive
c. all the slope parameters are zero
d. the independent variables are binary
18. Which of the following is true?
a. If we can estimate hi for each i, it means that we can proceed directly with WLS
estimation.
b. The WLS method fails if hi is negative or zero for any observation
c. The simplest way to deal with homoskedasticity in the linear probability model is
to continue to use OLS estimation.
d. The probability p(x) depends on the error term.
19. The interpretation of goodness-of-fit measures changes in the presence of
heteroskedasticity.
Answer: False
20. The population R-squared is affected when heteroskedasticity is present in
Var(u/x1,…,xk).
Answer: False
21. Multicollinearity among the independent variables in a linear regression
model causes the heteroskedasticity-robust standard errors to be large.
Answer: True
22. When the error variance differs across the two groups, we can obtain a
heteroskedasticity-robust Chow test by including a dummy variable
distinguishing the two groups along with interactions between that dummy
variable and all other explanatory variables.
Answer: True
23. If the Breusch-Pagan Test for heteroskedasticity results in a large p-value,
the null hypothesis of homoskedasticty is rejected.
Answer: False
24. The generalized least square estimators for correcting heteroskedasticity
are called weighed least squares estimators.
Answer: True
25. The linear probability model always contains heteroskedasticity when the
dependent variable is a binary variable unless all of the slope parameters are
zero.
Answer: True

Chapter 9
1. Consider the following regression model: log(y) = β 0 + β1x1 + β2x12 + β3x3 + u.
This model will suffer from functional form misspecification if _____.
a. β0 is omitted from the model
b. u is heteroskedastic
c. x12 is omitted from the model
d. x3 is a binary variable
2. A regression model suffers from functional form misspecification if _____.
a. a key variable is binary.
b. the dependent variable is binary.
c. an interaction term is omitted.
d. the coefficient of a key variable is zero.
3. Which of the following is true?
a. A functional form misspecification can occur if the level of a variable is used when
the logarithm is more appropriate.
b. A functional form misspecification occurs only if a key variable is uncorrelated with
the error term. .
c. A functional form misspecification does not lead to biasedness in the ordinary
least squares estimators.
d. A functional form misspecification does not lead to inconsistency in the ordinary
least squares estimators.
4. Which of the following is true of Regression Specification Error Test
(RESET)?
a. It tests if the functional form of a regression model is misspecified.
b. It detects the presence of dummy variables in a regression model.
c. It helps in the detection of heteroskedasticity when the functional form of the
model is correctly specified.
d. It helps in the detection of multicollinearity among the independent variables in a
regression model.
5. A proxy variable _____.
a. increases the error variance of a regression model
b. cannot contain binary information
c. is used when data on a key independent variable is unavailable
d. is detected by running the Davidson-MacKinnon test
6. Which of the following assumptions is needed for the plug-in solution to the
omitted variables problem to provide consistent estimators?
a. The error term in the regression model exhibits heteroskedasticity.
b. The error term in the regression model is uncorrelated with all the independent
variables.
c. The proxy variable is uncorrelated with the dependent variable.
d. The proxy variable has zero conditional mean.
7. Which of the following is a drawback of including proxy variables in a
regression model?
a. It leads to misspecification analysis.
b. It reduces the error variance.
c. It increases the error variance.
d. It exacerbates multicollinearity.
8. Consider the following equation for household consumption expenditure:
Consmptn= β0+ β1Inc + β2Consmptn-1+ u where ‘Consmptn’ measures the
monthly consumption expenditure of a household, ‘Inc’ measures household
income and ‘Consmptn-1’ is the consumption expenditure in the previous
month. Consmptn-1 is a ____ variable.
a. exogenous
b. binary variable
c. lagged dependent
d. proxy variable
9. A measurement error occurs in a regression model when _____.
a. the observed value of a variable used in the model differs from its actual value
b. the dependent variable is binary
c. the partial effect of an independent variable depends on unobserved factors
d. the model includes more than two independent variables
10. The classical errors-in-variables (CEV) assumption is that _____.
a. the error term in a regression model is correlated with all observed explanatory
variables
b. the error term in a regression model is uncorrelated with all observed explanatory
variables
c. the measurement error is correlated with the unobserved explanatory variable
d. the measurement error is uncorrelated with the unobserved explanatory variable
11. Which of the following is true of measurement error?
a. If measurement error in a dependent variable has zero mean, the ordinary least
squares estimators for the intercept are biased and inconsistent.
b. If measurement error in an independent variable is uncorrelated with the variable,
the ordinary least squares estimators are unbiased.
c. If measurement error in an independent variable is uncorrelated with other
independent variables, all estimators are biased.
d. If measurement error in a dependent variable is correlated with the independent
variables, the ordinary least squares estimators are unbiased.
12. Sample selection based on the dependent variable is called _____.
a. random sample selection
b. endogenous sample selection
c. exogenous sample selection
d. stratified sample selection
13. The method of data collection in which the population is divided into
nonoverlapping, exhaustive groups is called _____.
a. random sampling
b. stratified sampling
c. endogenous sampling
d. exogenous sampling
14. Which of the following types of sampling always causes bias or
inconsistency in the ordinary least squares estimators?
a. Random sampling
b. Exogenous sampling
c. Endogenous sampling
d. Stratified sampling
15. Which of the following is a difference between least absolute deviations
(LAD) and ordinary least squares (OLS) estimation?
a. OLS is more computationally intensive than LAD.
b. OLS is more sensitive to outlying observations than LAD.
c. OLS is justified for very large sample sizes while LAD is justified for smaller
sample sizes.
d. OLS is designed to estimate the conditional median of the dependent variable
while LAD is designed to estimate the conditional mean.
16. An explanatory variable is called exogenous if it is correlated with the error
term.
Answer: False
17. A multiple regression model suffers from functional form misspecification
when it does not properly account for the relationship between the dependent
and the observed explanatory variables.
Answer: True
18. The measurement error is the difference between the actual value of a
variable and its reported value.
Answer: True
19. Studentized residuals are obtained from the original OLS residuals by
dividing them by an estimate of their standard deviation.
Answer: True
20. The Least Absolute Deviations (LAD) estimators in a linear model minimize
the sum of squared residuals.
Answer: False
21. 13. A complete cases estimator is an estimator that uses:
a. complete information about the residuals.
b. only observations with a complete set of data on y and x1, ..., xk.
c. complete information about the outliers.
d. only observations with a complete set of data on x1, ..., xk.
22. 14. How many new variables should be created for a multiple regression
model where data are always available for y and x1, x2, ..., xk−1 but are
sometimes missing for the explanatory variable xk?
a. Four variables
b. One variable
c. Two variables
Rationale:
FEEDBACK: Two new variables should be created for a multiple regression model
where data are always available for y and x1, x2, ..., xk−1 but are sometimes
missing for the explanatory variable xk. For a unit i, the first variable, say zik, is
defined to be xik when xik is observed, and zero otherwise. The second variable is a
"missing data indicator," say mik,which equals one when xik is missing and equals
zero when xik is observed.
d. Three variables
23. 5. Which of the following is a test of nontested models?
a. Davidson-MacKinnon test
b. Standard F test
c. Regression Specification Error Test
d. White test

24. 24. If the data are missing at random, then the missing data do not cause
any statistical problems.
Asnwer: True

25. 21. One of the assumptions for the plug-in solution to provide consistent
estimator of β1 and β2 is that the error u is uncorrelated with all the
independent variables.
Answer: True

Chapter 10
1. Which of the following correctly identifies a difference between cross-
sectional data and time series data?
a. Cross-sectional data is based on temporal ordering, whereas time series data is
not.
b. Time series data is based on temporal ordering, whereas cross-sectional data is
not.
c. Cross-sectional data consists of only qualitative variables, whereas time series
data consists of only quantitative variables.
d. Time series data consists of only qualitative variables, whereas cross-sectional
data does not include qualitative variables.
2. A stochastic process refers to a:
a. sequence of random variables indexed by time.
b. sequence of variables that can take fixed qualitative values.
c. sequence of random variables that can take binary values only.
d. sequence of random variables estimated at the same point of time.
3. The sample size for a time series data set is the number of:
a. variables being measured.
b. time periods over which we observe the variables of interest less the number of
variables being measured.
c. time periods over which we observe the variables of interest plus the number of
variables being measured.
d. time periods over which we observe the variables of interest.
4. The model: Yt = β0+β1ct+ ut, t = 1,2,.......n, is an example of a(n):
a. autoregressive conditional heteroskedasticity model.
b. static model.
c. finite distributed lag model.
d. infinite distributed lag model.
5. A static model is postulated when:
a. a change in the independent variable at time ‘t’ is believed to have an effect on
the dependent variable at period ‘t + 1’.
b. a change in the independent variable at time ‘t’ is believed to have an effect on
the dependent variable for all successive time periods.
c. a change in the independent variable at time ‘t’ does not have any effect on the
dependent variable.
d. a change in the independent variable at time ‘t’ is believed to have an immediate
effect on the dependent variable.
6. Refer to the following model.
yt = α0 + β0st + β1st-1 + β2st-2 + β3st-3 + ut
This is an example of a(n):
a. infinite distributed lag model.
b. finite distributed lag model of order 1.
c. finite distributed lag model of order 2.
d. finite distributed lag model of order 3.
7. Refer to the following model.
yt = α0 + β0st + β1st-1 + β2st-2 + β3st-3 + utβ0 + β1 + β2 + β3 represents:
a. the short-run change in y given a temporary increase in s.
b. the short-run change in y given a pmanent increase in s.
c. the long-run change in y given a permanent increase in s.
d. the long-run change in y given a temporary increase in s.
8. Which of the following is an assumption on which time series regression is
based?
a. A time series process follows a model that is nonlinear in parameters.
b. In a time series process, no independent variable is a perfect linear combination
of the others.
c. In a time series process, at least one independent variable is a constant.
d. For each time period, the expected value of the error ut, given the explanatory
variables for all time periods, is positive.
9. Under the assumptions of time series regression, which of the following
statements will be true of the following model: yt = α0 + α1dt + ut?
a. d can have a lagged effect on y.
b. ut can be correlated with past and future values of d.
c. Changes in the error term cannot cause future changes in d.
d. Changes in d cannot cause changes in y at the same point of time.
10. If an explanatory variable is strictly exogenous it implies that:
a. changes in the lag of the variable does not affect future values of the dependent
variable.
b. the variable is correlated with the error term in all future time periods.
c. the variable cannot react to what has happened to the dependent variable in the
past.
d. the conditional mean of the error term given the variable is zero.
11. A study which observes whether a particular occurrence influences some
outcome is referred to as a(n):
a. event study.
b. exponential study.
c. laboratory study.
d. comparative study.
12. With base year 1990, the index of industrial production for the year 1999 is
112. What will be the value of the index in 1999, if the base year is changed to
1982 and the index measured 96 in 1982?
a. 112.24
b. 116.66
c. 85.71
d. 92.09
13. Which of the following statements is true?
a. The average of an exponential time series is a linear function of time.
b. The average of a linear sequence is an exponential function of time.
c. When a series has the same average growth rate from period to period, it can be
approximated with an exponential trend.
d. When a series has the same average growth rate from period to period, it can be
approximated with a linear trend.
14. Adding a time trend can make an explanatory variable more significant if:
a. the dependent and independent variables have similar kinds of trends, but
movement in the independent variable about its trend line causes movement in the
dependent variable away from its trend line.
b. the dependent and independent variables have similar kinds of trends and
movement in the independent variable about its trend line causes movement in the
dependent variable towards its trend line.
c. the dependent and independent variables have different kinds of trends and
movement in the independent variable about its trend line causes movement in the
dependent variable towards its trend line.
d. the dependent and independent variables have different kinds of trends, but
movement in the independent variable about its trend line causes movement in the
dependent variable away from its trend line.
15. A seasonally adjusted series is one which:
a. has had seasonal factors added to it.
b. has seasonal factors removed from it.
c. has qualitative explanatory variables representing different seasons.
b. has qualitative dependent variables representing different seasons.
16. Economic time series are outcomes of random variables.
Answer: True
17. In a static model, one or more explanatory variables affect the dependent
variable with a lag.
Answer: False
18. is based on series which exhibit serial correlation.
Answer: False
19. Price indexes are necessary for turning a time series measured in real
value into nominal value.
Answer: False
20. Dummy variables can be used to address the problem of seasonality in
regression models.
Answer: True
21. 14. The propensity δ0 + δ1+ … + δk is sometimes called the:
a. long-run elasticity, which measures the percentage increase in a dependent
variable after k quarters given a permanent 1% increase in the k independent
variables.
b. long-run elasticity, which measures the percentage decrease in a dependent
variable after k quarters given a permanent 1% decrease in the k independent
variables.
c. short-run elasticity, which measures the percentage increase in a dependent
variable after k quarters given a permanent 1% increase in the k independent
variables.
d. short-run elasticity, which measures the percentage decrease in a dependent
variable after k quarters given a permanent 1% decrease in the k independent
variables.
22. 18. If a1>0, then yt in the linear function of time E(yt)=a0+a1t displays a(n):
a. upward trend
b. downward trend
c. exponential trend
d. quadratic trend
23. 23. The short-run elasticity measures the immediate percentage change in
a dependent variable given a 1% increase in the independent variables.
Answer: True
24. 25. When a series has the same average growth rate from period to period,
then it can be approximated by an exponential trend
Answer: True
25. 10. Which of the following rules out perfect collinearity among the
regressors?
a. Multiple regression
b. Simple regression
c. Time series regression
d. Cross-sectional regression

Chapter 11
1. A process is stationary if:
a. any collection of random variables in a sequence is taken and shifted ahead by
h time periods; the joint probability distribution changes.
b. any collection of random variables in a sequence is taken and shifted ahead by h
time periods, the joint probability distribution remains unchanged.
c. there is serial correlation between the error terms of successive time periods and the
explanatory variables and the error terms have positive covariance.
d. there is no serial correlation between the error terms of successive time periods and
the explanatory variables and the error terms have positive covariance.
2. Covariance stationary sequences where Corr(xt+xt+h) → 0 as h → ∞ are said to
be:
a. unit root processes
b. trend-stationary processes
c. serially uncorrelated
d. asymptotically uncorrelated
3. A stochastic process {xt: t = 1,2,....} with a finite second moment [E(xt2) < ∞] is
covariance stationary if:
a. E(xt) is variable, Var(xt) is variable, and for any t, h ≥ 1, Cov(xt, xt+h) depends only on
‘h’ and not on ‘t’.
b. E(xt) is variable, Var(xt) is variable, and for any t, h ≥ 1, Cov(xt, xt+h) depends only on
‘t’ and not on h.
c. E(xt) is constant, Var(xt) is constant, and for any t, h ≥ 1, Cov(xt, xt+h) depends only on
‘h’ and not on ‘t’.
d. E(xt) is constant, Var(xt) is constant, and for any t, h ≥ 1, Cov(xt, xt+h) depends only on
‘t’ and not on ‘h’.
4. A covariance stationary time series is weakly dependent if:
a. the correlation between the independent variable at time ‘t’ and the dependent
variable at time ‘t + h’ goes to ∞ as h → 0.
b. the correlation between the independent variable at time ‘t’ and the dependent
variable at time ‘t + h’ goes to 0 as h → ∞.
c. the correlation between the independent variable at time ‘t’ and the independent
variable at time ‘t + h’ goes to ∞ as h → 0.
d. the correlation between the independent variable at time ‘t’ and the independent
variable at time ‘t + h’ goes to 0 as h → ∞.
5. The model yt = et + β1et – 1 + β2et – 2 , t = 1, 2, ..... , where et is an i.i.d. sequence
with zero mean and variance σ2e represents a(n):
a. static model.
b. moving average process of order one.
c. moving average process of order two.
d. autoregressive process of order two.
6. The model xt = α1xt – 1 + et , t =1,2,.... , where et is an i.i.d. sequence with zero
mean and variance σ2e represents a(n):
a. moving average process of order one.
b. moving average process of order two.
c. autoregressive process of order one.
d. autoregressive process of order two.
7. Which of the following is assumed in time series regression?
a. There is no perfect collinearity between the explanatory variables.
b. The explanatory variables are contemporaneously endogenous.
c. The error terms are contemporaneously heteroskedastic.
d. The explanatory variables cannot have temporal ordering.
8. Suppose ut is the error term for time period ‘t’ in a time series regression model
the explanatory variables are xt = (xt1, xt2 ...., xtk). The assumption that the errors
are contemporaneously homoskedastic implies that:
a. Var(ut|xt) = √σ.
b. Var(ut|xt) = ∞.
c. Var(ut|xt) = σ2.
d. Var(ut|xt) = σ.
9. Which of the following statements is true?
a. A model with a lagged dependent variable cannot satisfy the strict exogeneity
assumption.
b. Stationarity is critical for OLS to have its standard asymptotic properties.
c. Efficient static models can be estimated for nonstationary time series.
d. In an autoregressive model, the dependent variable in the current time period varies
with the error term of previous time periods.
10. Consider the model: yt = α0 + α1rt1 + α2rt2 + ut. Under weak dependence, the
condition sufficient for consistency of OLS is:
a. E(rt1|rt2) = 0.
b. E(yt |rt1, rt2) = 0.
c. E(ut |rt1, rt2) = 0.
d. E(ut |rt1, rt2) = ∞.
11. The model yt = yt – 1 + et, t = 1, 2, ... represents a:
a. AR(2) process.
b. MA(1) process.
c. random walk process.
d. random walk with a drift process.
12. Which of the following statements is true?
a. A random walk process is stationary.
b. The variance of a random walk process increases as a linear function of time.
c. Adding a drift term to a random walk process makes it stationary.
d. The variance of a random walk process with a drift decreases as an exponential
function of time.
13. If a process is said to be integrated of order one, or I(1), _____.
a. it is stationary at level
b. averages of such processes already satisfy the standard limit theorems
c. the first difference of the process is weakly dependent
d. it does not have a unit root
Answer: c
14. Unit root processes, such as a random walk (with or without drift), are said to
be:
a. integrated of order one.
b. integrated of order two.
c. sequentially exogenous.
d. asymptotically uncorrelated.
15. Which of the following statements is true of dynamically complete models?
a. There is scope of adding more lags to the model to better forecast the dependent
variable.
b. The problem of serial correlation does not exist in dynamically complete models.
c. All econometric models are dynamically complete.
d. Sequential endogeneity is implied by dynamic completeness..
16. In the model yt = α0 + α1xt1 + α2xt2 + ..... + αkxtk + ut, the explanatory variables, xt
= (xt1, xt2 ...., xtk), are sequentially exogenous if:
a. E(ut|xt , xt-1, ......) = E(ut) = 0, t = 1,2, ....
b. E(ut|xt , xt-1, ......) ≠ E(ut) = 0, t = 1,2, ....
c. E(ut|xt , xt-1, ......) = E(ut) > 0, t = 1,2, ....
d. E(ut|xt , xt-1, ......) = E(ut) = 1, t = 1,2, ....
17. Which of the following is a strong assumption for static and finite distributed
lag models?
a. Dynamic completeness
b. Sequential exogeneity
c. Strict exogeneity
d. Homoskedasticity
18. If ut refers to the error term at time ‘t’ and yt – 1 refers to the dependent variable
at time ‘t – 1’, for an AR(1) process to be homoskedastic, it is required that:
a. Var(ut|yt – 1) > Var(yt|yt-1)= σ2.
b. Var(ut|yt – 1) = Var(yt|yt-1)> σ2.
c. Var(ut|yt – 1) < Var(yt|yt-1)= σ2.
d. Var(ut|yt – 1) = Var(yt|yt-1)= σ2.
19. Covariance stationarity focusses only on the first two moments of a
stochastic process.
Answer: True

20. Weakly dependent processes are said to be integrated of order zero.


Answer: True
21. If a process is a covariance stationary process, then it will have a finite
second moment.
Answer: False
22. Under adaptive expectations, the expected current value of a variable does
not depend on a recently observed value of the variable.
Answer: False
23. The variance of a random walk process decreases as a linear function of time.
Answer: False
24. Sequential exogeneity is implied by dynamic completeness.
Answer: True
25. The homoskedasticity assumption in time series regression suggests that the
variance of the error term cannot be a function of time.
Answer: True

Chapter 12
1. In the presence of serial correlation:
a. estimated standard errors remain valid.
b. estimated test statistics remain valid.
c. estimated OLS values are not BLUE.
d. estimated variance does not differ from the case of no serial correlation.
2. When a series is stationary, weakly dependent, and has serial correlation:
a. the adjusted R2 is inconsistent, while R2 is a consistent estimator of the population
parameter.
b. the adjusted R2 is consistent, while R2 is an inconsistent estimator of the
population parameter.
c. both the adjusted R2 and R2 are inconsistent estimators of the population
parameter.
d. both the adjusted R2 and R2 are consistent estimators of the population
parameter.
3. Which of the following is a test for serial correlation in the error terms?
a. Johansen test
b. Dickey Fuller test
c. Durbin Watson test
d. White test
4. For a given significance level, if the calculated value of the Durbin Watson
statistic lies between the lower critical value and the upper critical value,
_____.
a. the hypothesis of no serial correlation is accepted
b. the hypothesis of no serial correlation is rejected
c. the test is inconclusive
d. the hypothesis of heteroskedasticity is accepted
5. Which of the following statements is true?
a. When explanatory variables are not strictly exogenous, the t test for serial
correlation is valid.
b. When explanatory variables are not strictly exogenous, the Durbin Watson test for
serial correlation is valid.
c. Breusch-Godfrey test can be used to check for second order serial correlation.
d. White test can be used to check for second order serial correlation.
6. The Breusch-Godfrey test statistic follows a:
a. χ2 distribution.
b. t distribution.
c. normal distribution.
d. F distribution.
7. In a model based on a weakly dependent time series with serial correlation
and strictly exogenous explanatory variables, _____.
a. the feasible generalized least square estimates are unbiased
b. the feasible generalized least square estimates are BLUE
c. the feasible generalized least square estimates are asymptotically more efficient
than OLS estimates
d. the feasible generalized least square estimates are asymptotically less efficient
than OLS estimates
8. Which of the following is an example of FGLS estimation?
a. Dickey-Fuller estimation
b. Vector error correction estimation
c. Prais-Winsten estimation
d. OLS estimation.
9. Which of the following is the reason why standard errors measured by OLS
differ from standard errors measured through Prais-Winsten transformation?
a. OLS standard errors account for serial correlation, whereas Prais-Winsten
estimations do not.
b. Prais-Winsten standard errors account for serial correlation, whereas OLS
estimations do not.
c. Prais-Winsten standard errors account for heteroskedasticity, whereas OLS
estimations do not.
d. OLS standard errors account for heteroskedasticity, whereas Prais-Winsten
estimations do not.
10. Which of the following identifies an advantage of first differencing a time-
series?
a. First differencing eliminates most of the serial correlation.
b. First differencing eliminates most of the heteroskedastcicty.
c. First differencing eliminates most of the multicollinearity.
d. First differencing eliminates the possibility of spurious regression.
11. Which of the following is a limitation of serial correlation-robust standard
errors?
a. The serial correlation-robust standard errors are smaller than OLS standard errors
when there is serial correlation.
b. The serial correlation-robust standard errors can be poorly behaved when there is
substantial serial correlation and the sample size is small.
c. The serial correlation-robust standard errors cannot be calculated for
autoregressive processes of an order greater than one.
d. The serial correlation-robust standard errors cannot be calculated after relaxing
the assumption of homoskedasticity.
12. Which of the following statements is true?
a. Prais-Winsten and Cochrane-Orcutt transformations are consistent when
explanatory variables are not strictly exogenous.
b. The SC-robust standard errors cannot be estimated in models with lagged
dependent variables.
c. The SC-robust standard errors work better after quasi-differencing a time series
that is expected to be serially correlated.
d. Estimation of SC-robust standard errors is independent of the sample size.
13. In the presence of heteroskedasticity, the usual OLS estimates of:
a. standard errors are valid, whereas the t statistics and F statistics are invalid.
b. t statistics are valid, but the standard errors and F statistics are invalid.
c. F statistics are valid, but the standard errors and t statistics are invalid.
d. standard errors, t statistics, and F statistics are invalid.
14. Which of the following tests can be used to test for heteroskedasticity in a
time series?
a. Johansen test
b. Dickey-Fuller test
c. Breusch-Pagan test
d. Durbin’s alternative test
15. The equation u2t = α0 + α1u2t– 1 + vt is an autoregressive model in _____.
a. ut
b. u2t
c. vt
d. ut – 1
16. In presence of serial correlation, the OLS variance formula accurately
estimates the true variance of the OLS estimator.
Answer: False
17. Durbin’s alternative test is valid even if the explanatory variables are
strictly exogenous.
Answer: True
18. Consistency of feasible generalized least square estimators requires the
error term to be correlated with lags of the explanatory variable.
Answer: False
19. FGLS estimates are efficient when explanatory variables are not strictly
exogenous.
Answer: False
20. In time series regressions, it is advisable to check for serial correlation
first, before checking for heteroskedasticity.
Answer: True

Chapter 14
1. Which of the following assumptions is required for obtaining unbiased fixed
effect estimators?
a. The errors are heteroskedastic.
b. The errors are serially correlated.
c. The explanatory variables are strictly exogenous.
d. The unobserved effect is correlated with the explanatory variables.
2. A pooled OLS estimator that is based on the time-demeaned variables is
called the _____.
a. random effects estimator
b. fixed effects estimator
c. least absolute deviations estimator
d. instrumental variable estimator
3. What should be the degrees of freedom (df) for fixed effects estimation if
the data set includes ‘N’ cross sectional units over ‘T’ time periods and the
regression model has ‘k’ independent variables?
a. N-kT
b. NT-k
c. NT-N-k
d. N-T-k
4. Which of the following types of variables cannot be included in a fixed
effects model?
a. Dummy variable
b. Discrete dependent variable
c. Time-varying independent variable
d. Time-constant independent variable
5. Which of the following is a property of dummy variable regression?
a. This method is best suited for panel data sets with many cross-sectional
observations.
b. The R-squared obtained from this method is lower than that obtained from
regression on time-demeaned data.
c. The degrees of freedom cannot be computed directly with this method.
d. The major statistics obtained from this method are identical to that obtained from
regression on time-demeaned data.
6. Which of the following is a difference between a fixed effects estimator and
a first-difference estimator?
a. The fixed effects estimators are always larger than the first difference estimators
in a two-period panel data analysis.
b. The fixed effects estimator is more efficient than the first-difference estimator
when the idiosyncratic errors are serially uncorrelated.
c. The first difference estimator is more sensitive to nonnormality and
heteroskedasticity.
d. The bias in the first difference estimator depends on the time period (T) of
analysis while the bias in the fixed effect does not depend on T.
7. Which of the following assumptions is required for obtaining unbiased
random effect estimators?
a. The idiosyncratic errors are heteroskedastic.
b. The unobserved effect is independent of all explanatory variables in all time
periods.
c. The idiosyncratic errors are serially correlated.
d. The unobserved effect is correlated with the explanatory variables.
8. The estimator obtained through regression on quasi-demeaned data is
called the _____.
a. random effects estimator
b. fixed effects estimator
c. hetroskedasticity-robust OLS estimator
d. instrumental variables estimator
9. The random effects approach _____.
a. cannot be used if the key explanatory variable is constant over time.
b. is preferred to pooled OLS because RE is generally more efficient.
c. is suitable if the Hausman test rejects the assumption that the unobserved effect
is uncorrelated with the explanatory variables.
d. is more convincing than fixed effects for policy analysis using aggregate data.
10. The random effects estimate is identical to the fixed effects estimate if the
estimated transformation parameter, ^θ, in generalized least squares
estimation that eliminates serial correlation between error terms is, _____.
a. less than zero
b. equal to zero
c. equal to one
d. greater than one
11. Which of the following is true of the correlated random effects approach
(CRE)?
a. The CRE approach assumes that the unobserved effect is uncorrelated with the
observed explanatory variables.
b. The CRE approach cannot be used if the regression model includes a time-
constant explanatory variable.
c. The CRE approach considers that the unobserved effect is correlated with the
average level of explanatory variables.
d. The CRE estimate equals the random effects estimate.
12. Which of the following is a reason for using the correlated random effects
approach?
a. It provides unbiased and consistent estimators when the idiosyncratic errors are
serially correlated.
b. It provides unbiased and consistent estimators when the idiosyncratic errors are
heteroskedastic.
c. It provides a more efficient estimate than the fixed effects approach.
d. It provides a way to include time-constant explanatory variables in a fixed effects
analysis.
13. In the correlated random effects approach, the regression model includes
_____.
a. time averages as separate explanatory variables
b. at least one dummy variable
c. more than one endogenous explanatory variable
d. an instrumental variable
14. An economist wants to study the effect of income on savings. He collected
data on 120 identical twins. Which of the following methods of estimation is
the most suitable method, if income is correlated with the unobserved family
effect?
a. Random effects estimation
b. Fixed effects estimation
c. Ordinary least squares estimation
d. Weighted Least squares estimation
15. Which of the following statements is true?
a. Fixed effects estimation is not suitable when the unobserved cluster effect is
correlated with one or more explanatory variables.
b. Fixed effects approach is not applicable if the key explanatory variables change
only at the level of the cluster.
c. The ordinary least squares standard errors are incorrect when there is cluster
effect.
d. Random effects estimation can be applied to a cluster sample only if the
unobserved cluster effect is correlated with one or more explanatory variables.
16. A data set is called an unbalanced panel if it has missing years for at least
some cross-sectional units in the sample.
Answer: True
17. In a random effects model, we assume that the unobserved effect is
correlated with each explanatory variable.
Answer: False
18. The value of the estimated transformation parameter in generalized least
square estimation that eliminates serial correlation in error terms indicates
whether the estimates are likely to be closer to the pooled OLS or the fixed
effects estimates.
Answer: True
19. The correlated random effects approach cannot be applied to models with
many time-varying explanatory variables.
Answer: False
20. Pooled ordinary least squares estimation is commonly applied to cluster
samples when eliminating a cluster effect via fixed effects is infeasible or
undesirable.
Answer: True

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