The distinction between endogenous and exogenous variables is
A)that exogenous variables are determined inside the model and endogenous variables are determined outside the model.
B)dependent on the sample size: for n 100, endogenous variables become exogenous.
C)depends on the distribution of the variables: when they are normally distributed, they are exogenous, otherwise they are endogenous.
D)whether or not the variables are correlated with the error term.

Question

The distinction between endogenous and exogenous variables is
A)that exogenous variables are determined inside the model and endogenous variables are determined outside the model.
B)dependent on the sample size: for n > 100, endogenous variables become exogenous.
C)depends on the distribution of the variables: when they are normally distributed, they are exogenous, otherwise they are endogenous.
D)whether or not the variables are correlated with the error term.

Quizplus · Accepted Answer

The distinction between endogenous and exogenous variables depends on whether or not the variables are correlated with the error term. If a variable is correlated with the error term, it is endogenous, and if it is not correlated with the error term, it is exogenous. This is because endogeneity implies that the variable is jointly determined with the dependent variable, which violates the assumption of exogeneity in a regression model.

The Distinction Between Endogenous and Exogenous Variables Is