Consider the following simple regression model: y = ₀ + ₁x₁ + u. In order to obtain consistent estimators of ₀ and ₁, when x and u are correlated, a new variable z is introduced into the model which satisfies the following two conditions: Cov(z,x) 0 and Cov (z,u) = 0. The variable z is called a(n) _____ variable. A)dummy B)instrumental C)lagged dependent D)random

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Quizplus · Accepted Answer

The variable z in this scenario is an instrumental variable. It is introduced to solve the issue of correlation between x and u and obtain consistent estimators for the coefficients of interest. This is a common technique in econometrics known as instrumental variables regression. Dummy variables are used to represent categorical variables in regression models, lagged dependent variables are used in autoregressive models, and random variables have various applications but are not relevant to this scenario.

Consider the Following Simple Regression Model: Y = 0

Consider the Following Simple Regression Model: Y = ₀