Deck 16: Simultaneous Equations Models

Question 1

The following equations represent a simultaneous equations model: K₁ = α₁K₂ + β₁z₁ + u₁
K₂ = α₂K₁ + β₂z₂ + u₂
OLS will suffer from simultaneity bias if:

A)u₁is correlated with z₁.
B)z₁ is correlated with z₂.
C)K₂ is correlated with u₁.
D)K_1? is correlated with u₁.

Answer 1

C

Question 2

An equation in the simultaneous equations model satisfies the order condition for identification if:

A)the number of excluded endogenous variables from the equation is at most as large as the number of right-hand side exogenous variables.
B)the number of excluded endogenous variables from the equation is at least as large as the number of right-hand side exogenous variables.
C)the number of excluded exogenous variables from the equation is at most as large as the number of right-hand side endogenous variables.
D)the number of excluded exogenous variables from the equation is at least as large as the number of right-hand side endogenous variables.

Answer 2

D

Question 3

The rank condition for identification of a structural equation states that the first equation in a two-equation simultaneous equations model is identified if,and only if:

A)the first equation contains at least one exogenous variable (with a nonzero coefficient)that is excluded from the second equation.
B)the first equation contains at least two exogenous variables (with a nonzero coefficient)that are excluded from the second equation.
C)the second equation contains at least one exogenous variable (with a nonzero coefficient)that is excluded from the first equation.
D)the second equation contains at least two exogenous variables (with a nonzero coefficient)that are excluded from the first equation.

Answer 3

C

Question 4

Which of the following statements is true?

A)White test can be used to efficiently determine the presence of serial correlation in panel data.
B)The t statistic is not an efficient test to determine serial correlation in panel data.
C)Instrumental variables for both endogenous and exogenous variables are required for estimating simultaneous equation models concerned with panel data.
D)2SLS should be applied to simultaneous equation models with panel data only after removing the unobserved effects from the equations of interest.

Question 5

If a structured model contains a time trend-which may capture exogenous,trending factors that are not directly modeled-then the trend acts as its own instrumental variable.

Question 6

The following equations represent a simultaneous equations model: K₁ = α₁K₂ + β₁z₁ + u₁
K₂ = α₂K₁ + β₂z₂ + u₂
The reduced form equation for K₂ will express:

A)K₁ as a function of K₂ and the error terms.
B)K₂ as a function of K₁ and the error terms.
C)K₂ as a function of exogenous variables and the error terms.
D)K₁ as a function of exogenous variables,the error terms,and K₂.

Question 7

The following simultaneous equations describe the demand and supply for a particular good in a competitive market. Q_i = α₁P_i + β₁z_i1 + u_i1
Q_i = α₂P_i + β₂z_i2 + u_i2
Which of the following are the endogenous variables in this model?

A)P_i,z_i1,and z_i2
B)P_i andQ_i
C)z_i1,and z_i2
D)u_i1 and u_i2

Question 8

Which of the following correctly highlights a limitation of applying simultaneous equation models to time series data?

A)Most time series have variables with a unit root and 2SLS is complicated when applied to equations with such variables.
B)2SLS estimates are inefficient when applied to variables that are not in their levels but in first differences.
C)It is difficult to form simultaneous equations which satisfy the rank and order conditions using time series data.
D)The problem of serial correlation greatly limits the efficiency of simultaneous equation models and leads to inefficient estimations.

Question 9

Which of the following correctly identifies a characteristic of structural equations?

A)A structural equation should contain equal number of dependent and independent variables.
B)A structural equation should contain equal number of endogenous and exogenous variables.
C)A structural equation should have a behavioral,ceteris paribus interpretation on its own.
D)A structural equation should not contain structural errors.

Question 10

OLS is biased and inconsistent when applied to a structural equation in a simultaneous equations system.

Question 11

A predetermined variable in a simultaneous equations model is:

A)a constant.
B)the error term.
C)a lagged variable.
D)an omitted variable.

Question 12

The order condition is a necessary and sufficient condition for identification of an equation in a simultaneous equations model.

Question 13

Which of the following statements is true?

A)The use of 2SLS is applicable to simultaneous equations model with at most two equations.
B)Identification of simultaneous equations with three or more equations is based on matrix algebra.
C)2SLS method used in the estimation of simultaneous equations is an example of a system estimation method.
D)The maximum number of equations permissible for a simultaneous equations model is four.

Question 14

Exclusion restrictions are said to be imposed in a two-equation simultaneous equations model if it is assumed that:

A)certain exogenous variables do not appear in the first equation and others are absent from the second equation.
B)certain endogenous variables do not appear in the first equation and others are absent from the second equation.
B)the error terms in each equation is correlated with the exogenous variables.
C)the error terms in each equation is uncorrelated with the exogenous variables.

Question 15

Refer to the simultaneous equations model above.The reduced form error from the reduced form equation for K₂ will be a:

A)quadratic function of u₁ and u₂?,and correlated with z_1? and z₂.
B)quadratic function of u₁ and u₂?,and uncorrelated with z_1? and z₂.
C)linear function of u₁ and u₂?,and correlated with z_1? and z₂.
D)linear function of u₁ and u₂?,and uncorrelated with z_1? and z₂.

Question 16

An alternative to using simultaneous equation models with panel data is:

A)to use OLS estimates after first differencing the data.
B)to use fixed effects transformation on the equations and then apply 2SLS.
C)to convert the equations into reduced form and then apply feasible generalized least squares.
D)to convert the equations into reduced form and then apply OLS.

Question 17

A simultaneous equations model is suitable whenever two variables are determined simultaneously.

Question 18

In econometrics,simultaneity arises when:

A)strictly exogenous explanatory variables determine the dependent variable through a step-by-step process.
B)the error term is correlated with both the dependent variable and explanatory variables.
C)one or more of the explanatory variables is jointly determined with the dependent variable.
D)both serial correlation and heteroskedasticity are present in an hypothesized model.

Question 19

The instrumental variables in the two stage least squares estimation method consists of endogenous variables appearing in either equation.

Question 20

Which of the following is a method which can be used for estimation in simultaneous equations models?

A)Feasible generalized least squares estimation
B)Prais-Winsten transformation
C)Cochrane-Orcutt transformation
D)Two stage least squares estimation