For an instrument to be valid it must be
A)correlated with both the dependent variable and the endogenous variable.
B)uncorrelated with both the dependent variable and the endogenous variable.
C)correlated with the endogenous variable but uncorrelated with the error term.
D)correlated with the error term but uncorrelated with the endogenous variable.

Question

Quizplus · Accepted Answer

For an instrument to be valid, it must be correlated with the endogenous variable to have explanatory power but uncorrelated with the error term to avoid capturing the effects of omitted variables or measurement errors that could bias the estimation.

For an Instrument to Be Valid It Must Be