Quiz TH
Quiz TH
Quiz TH
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?
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
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
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?
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.
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 _____.
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
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