Instrument relevance
A)means that the instrument is one of the determinants of the dependent variable.
B)is the same as instrument exogeneity.
C)means that some of the variance in the regressor is related to variation in the instrument.
D)is not possible since X and u are correlated and Z and u are not correlated.

Question

Quizplus · Accepted Answer

Instrument relevance means that the variation in the instrument (Z) is related to the variation in the regressor (X). Therefore, some of the variance in the regressor (X) is explained by the instrument (Z), making it an important determinant of the dependent variable. Option A is incorrect since the dependent variable is not mentioned in the question. Option B is incorrect because instrument exogeneity refers to whether the instrument is unrelated to the error term (u), which is not specified in the question. Option D is incorrect because there is no mention of correlation between X and u or Z and u.

Instrument Relevance