Consider the following simple regression model: y = β₀+ β₁x₁+ u.In order to obtain consistent estimators of β₀and β₁,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 variable D)random

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The variable z introduced in this situation is called an instrumental variable. An instrumental variable is a variable that is correlated with the endogenous variable of interest (in this case, x), but is uncorrelated with the error term (in this case, u). By using an instrumental variable, we can address the issue of endogeneity and obtain consistent estimators of the coefficients of interest. Dummy variables are frequently used in regression models to represent categorical variables, lagged dependent variables are used to model autoregressive processes, and random variables do not have a specific meaning in this context.

Consider the Following Simple Regression Model: Y = β0+ β1x1

Consider the Following Simple Regression Model: Y = β₀+ β₁x₁