Econometric Exam 2 Flashcards - Quizlet

5/18/2021 Econometric exam 2 Flashcards | Quizlet
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Econometric exam 2
Terms in this set (74)
a variable that only takes the values 0 and 1.

Binary Variable
It's also called 'indicator' or 'dummy' variable.
The error term ui is homoskedastic if the variance of

the conditional distribution of ui given Xi is constant
Homoskedastic
for i=1,...,n and in particular does NOT depend on Xi.
Otherwise, the error term is heteroskedastic.
does not affect the coefficient estimates (B hat),

but it affects the calculation of their SE(B hat).
Heteroskedasticity affects... B hat is still unbiased, consistent, and asymptotically
normally distributed, but it no longer has the lowest
variance.
1) measurement error in y and/or x

Heteroskedasticity could signal
2) Model mis-specification (include ln(x) instead of
other problem with our
x)
model...
3) omitted variables from the model
1) Plot the data (y and x)

2) Plot residuals against x
How to check for Heterosk.? 3) Plot residuals against yi hat
4) Perform a Breusch-Pagan / Cook-Weisberg Test:
H0 : Homoskedasticity
How to correct for heterosk? We need to use heterosk-robust standard errors

Econometric exam 2
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If the regressor is correlated with a variable that has

been omitted from the analysis and that determines,
Omitted Variable Bias (OVB) in part, the dependent variable, then the OLS
estimator will have omitted variable bias.
1) a variable Z is correlated with an included

regressor, x
Conditions for OVB
AND
2) Z directly influences y.
in pop. regression the number of included regressors

line/function, k denotes
B0 hat, B1 hat....
OLS estimators -estimators of the coefficients B0, B1,...,Bk that
minimize the sum of squared mistakes
when one of the regressors in an exact linear

perfect multicollinearity arises
function of the other regressors.
when the set of regressors includes a complete set

Dummy variable trap arises of dummy variables for all possible outcomes in
addition to estimating the intercept
Imperfect Multicollinearity when two or more regressors are highly, but not
arises perfectly, correlated.
Measure of model fit: R- the portion of the variation in the dependent

squared variable, y, that is explained by the model
Econometric exam 2
accounts for the number of regressors, k, in our

Measure of model fit: 'adjusted'
model and imposes a penalty that is only offset if
R-squared
they have actual explanatory power.
estimator of standard deviation of ui

Measure of model fit: SER -measures the spread of observations around the
fitted regression line.
a regressor included to hold constant factors that, if

Control Variable neglected, could lead to OVB of the variable of
interest.
is used to test a joint hypothesis about regression

F-statistic
coefficients
the distribution of the sum of m squared standard

Chi-squared distribution normal random variables with degrees of freedom
m.
Nonlinear regression function a function with a slope that is not constant.
-The effect on Y of a change in X depends on the

value of X -that is, the marginal effect of X is not
constant.
-A linear regression is mis-specified: the functional
If a relation between Y and X is
form is wrong.
nonlinear:
-The estimator of the effect on Y of X is biased: in
general it isn't even right on average.
-The solution is to estimate a regression function
that is nonlinear in X.
Econometric exam 2
1) Identify a possible nonlinear relationship.

2) Specify a nonlinear function, and estimate its
parameters by OLS.
3) Determine whether the nonlinear model
improves upon the
linear model.
General Approach to Modeling a) Assess the statistical significance of coefficients
Nonlinearities on nonlinear terms.
b) Assess whether nonlinear model implies possible
OVB in linear model.
c) Assess model fit.
4) Plot the estimated nonlinear regression function.
5) Estimate the effect of a change in X on Y.
-Cannot use R2 or the adjusted R2 to compare

regressions when their dependent variables are
different.
-Cannot compare the fit of the 'log-log' and 'linear-
How can we compare
log' models.
logarithmic models?
-Can compare the fit of the log-log and log-linear
models.
-Can compare the fit of linear-log and polynomial
models.
The error term is homoskedastic if the variance of

the conditional distribution of mi given Xi is constant
When would the error term be
for
homoskedastic?
i equals 1....n, and in particular does not depend on
Xi.
The OLS estimators remain unbiased, consistent,

Which of the following
asymptotically normal, but do not necessarily have
statements describes the
the least variance among all estimators that are
mathematical implications of
linear in
heteroskedasticity?
Econometric exam 2 Y1....Yn conditional on X1,...., Xn
If the errors are homoskedasticity-only

heteroskedastic, then the t-
statistic computed using
__________________ standard error
does not have a standard
normal distribution, even in
large samples.
1. Average income per capita in the district. If this

variable is omitted, it will likely produce a(an)
UPWARD bias of the estimated effect on tests
scores of increasing the number of computers per
student.
2. The availability of computerized adaptive learning

For each source of bias below, tools in the district. If this variable is omitted, it will
determine whether B1 hat will likely produce a(an) UPWARD bias of the estimated
be biased up or down. effect on tests scores of increasing the number of
computers per student.
3. The availability of computer-related leisure

activities in the district. If this variable is omitted, it
will likely produce a(an) DOWNWARD bias of the
estimated effect on tests scores of increasing the
number of computers per student.
Econometric exam 2
A researcher plans to study the There are other important determinants of a

causal effect of police crime country's crime rate, including demographic
using data from a random characteristics of the population, that if left out of
sample of U.S. counties. He the regression would bias the estimated partial
plans to regress the county's effect of the (per capita) size of the county's police
crime rate on the (per capita) force.
size of the country's police
force.
Why is this regression likely to
suffer from omitted variable
bias?
Which of the following -The average income per capita of the county.
variables are likely useful to -The average level of education in the county.
add to the regression to -The fraction of young males in the county
control for important omitted population.
variables?
Suppose that crime rate is The regression will likely overestimate B1.
positively affected by the (B1 hat is likely to be larger than B1)
fraction of young males in the
population, and that counties
with high crime rates tend to
hire more police. Use the
following expression for
omitted variable bias to
determine whether the
regression will likely over- or
underestimate the effect of
police on the crime rate.
Econometric exam 2
A researcher is interested in -Work experience.

determining whether a large -Education level.
aerospace firm is guilty of -Type of engineer.
gender bias in setting wages.
To determine potential bias,
the researcher collects salary
and gender information for all
the firm's engineers. The
researcher then plans to
conduct a "difference in means"
test to determine whether the
average salary for women is
significantly less than the
average salary for men.
variables are likely useful to
add to the regression to
control for important omitted
variables?
Econometric exam 2
A researcher is interested in -Excessive drug or alcohol use.

determining whether the time -Gang activity
spent in prison has a
permanent effect on a person's
wage rate. He collects data on
a random sample of people
who have been out of prison
for at least 15 years. He
collects similar data on a
random sample of people who
have never served time in
prison. The data set includes
information on each person's
current wage, education, age,
ethnicity, gender, tenure (time
in current job), occupation, and
union status, as well as whether
the person was ever
incarcerated. The researcher
plans to estimate the effect of
incarceration on wages by
regressing wages on an
indicator variable for
incarceration, including in the
regression other potential
determinants of wages
(education, tenure, union
status, and so on).
variables? (Check all that apply
)
Econometric exam 2
A recent study found that the -Type of employment.

death rate for people who -Drug or alcohol use.
sleep 6 to 7 hours per night is -Indicator for chronic illness.
lower than the death rate for
people who sleep 8 or more
hours. The 1.1 million
observations used for this
study came from a random
survey of Americans aged 30
to 102. Each survey respondent
was tracked for 4 years. The
death rate for people sleeping
7 hours was calculated as the
ratio of the number of deaths
over the span of the study
among people sleeping 7
hours to the total number of
survey respondents who slept
7 hours. This calculation was
then repeated for people
sleeping 6 hours, and so on.
Based on this summary, would
you recommend that
Americans who sleep 9 hours
per night consider reducing
their sleep to 6 or 7 hours if
they want to prolong their
lives? Why or why not? Explain.
variables? (Check all that apply
)
Econometric exam 2
Consider the multiple -omitted variable bias.

regression model with two
regressors X1 and X2, where
both variables are
determinants of the dependent
variable. You first regress Y on
X1 only and find no
relationship. However, when
regressing Y on X1 and X2, the
slope coefficient β1 hat
changes by a large amount.
This suggests that your first
regression suffers from:
If you had a two-regressor can result in a negative value for the coefficient of
regression model, then the included variable, even though the coefficient
omitting one variable that is will have a significant positive effect on Y if the
relevant: omitted variable were included.
Consider the multiple if X1 and X2 are correlated.

regression model with two
regressors X1 and X2, where
both variables are
determinants of the dependent
variable.
When omitting X2 from the
regression, there will be
omitted variable bias for B1 hat:
Econometric exam 2
Since the researcher only Omitted variable bias arises when the omitted
incorporates the educational variable is correlated with a regressor and is a
attainment of an individual's determinant of the dependent variable.
father in the regression, and
not that of the individual's
mother, omitted variable bias
will occur.
statements correctly describes
the omitted variable bias?
Using the textbook example of use the heteroskedasticity-robust formula.

420 California school districts
and the regression of test
scores on the student-teacher
ratio, you find that the standard
error on the slope coefficient is
0.51 when using the
heteroskedasticity-robust
formula, while it is 0.48 when
employing the
homoskedasticity-only formula.
When calculating the t-statistic,
the recommended procedure
is to:
The adjusted R squared is 1- (n-1)/(n-k-1) x (SSR/TSS)

given by:
What degrees-of-freedom adjustment is required

Suppose n and k denote the
while calculating the standard error of the
sample size and number of
regression
regressors respectively.
(SER) from the sum of squared residuals (SSR)?
Econometric exam 2
Adjusted R^2 can be negative when the regressors,

taken together, reduce the sum of squared residuals
by such a small amount that this reduction fails to
statements is true?
offset the factor (n-1) / (n-k-1)
In which of the following Perfect multicollinearity occurs when one of the

scenarios does perfect regressors is a perfect linear function of the other
multicollinearity occur? regressors.
Why is it impossible to It is impossible to compute OLS estimators in the

compute OLS estimators in the presence of perfect multicollinearity because it
presence of perfect produces division by 0.
multicollinearity?
Perfect multicollinearity can be independent variables

rectified by modifying the
___________
Under the least squares are unbiased and consistent.

assumptions for the multiple
regression problem (zero
conditional mean for the error
term, all
Xi and Yi being i.i.d., all Xi and
Ui having finite fourth
moments, no perfect
multicollinearity), the OLS
estimators for the slopes and
intercept:
Econometric exam 2
-For the case of two regressors and

homoskedasticity, it can be shown mathematically
that the variance of the estimated coefficient β1
Which of the following explains
goes to infinity as the correlation between X1and X2
why two perfectly collinear
goes to one.
regressors cannot be included
-Intuitively, if one regressor is a linear function of
in a linear multiple regressions?
another, OLS cannot identify the partial effect of
one while holding the other constant.
Suppose you are interested in -The number of teachers expressed as a percentage

estimating the effect of the of the number of students.
student-teacher ratio (STR) on -The student-faculty parking ratio, if every teacher
test performance using the has a parking spot.
model. -The teacher-security officer ratio if the student-
Which of the following security officer ratio is 1:10.
regressors, if added to the
model, would be perfectly
collinear with STR? (Check all
that apply)
-Intuitively, estimating the partial effect of X1

holding X2
constant becomes difficult because after
Which of the following explains
controlling for X2, there is little variation left to
why it is difficult to estimate
precisely estimate the partial effect of X1.
precisely the partial effect of
-For the case of two regressors and
X1, holding X2 constant, if X1
homoskedasticity, it can be shown mathematically
and X2 are highly correlated?
that the variance of the estimated coefficient β1
goes to infinity as the correlation between X1 and
X2 goes to one.
means that two or more of the regressors are highly

Imperfect multicollinearity:
correlated.
Econometric exam 2
implies that it will be difficult to estimate precisely
Imperfect multicollinearity: one or more of the partial effects using the data at
hand.
Which of the following Omitted variable bias violates the assumption that
statements is not true about X1i...Xki is i.i.d.
the omitted variable bias?
Which of the following is the E(Ui | Xki....) = E(Ui | Wi....)

mathematical statement for the
conditional mean
independence assumption?
The dummy variable trap is an perfect multicollinearity.

example of:
If you wanted to test, using a subtract 1 from the estimated coefficient, divide the
5% significance level, whether difference by the standard error, and check if the
or not a specific slope resulting ratio is larger than 1.96.
coefficient is equal to one,
then you should:
In the multiple regression by dividing the estimate by its standard error.

model, the t-statistic for testing
that the slope is significantly
different from zero is
calculated:
When testing a joint use the F-statistics and reject at least one of the
hypothesis, you should: hypotheses if the statistic exceeds the critical value.
Econometric exam 2
The homoskedasticity-only F- different

statistic and the
heteroskedasticity-robust F-
statistic typically are:
The critical value of F 4, ∞ at 2.37

the 5% significance level is:
Which of the following -It modifies the "one-at-a-time" method so that it

statements are true in uses different critical values that ensure that its size
describing the Bonferroni equals its significance level.
method of testing hypotheses -Its advantage is that it applies very generally.
on multiple coefficients?
If the error term is -The improvement in the fit of the regression can be
homoskedastic, the F-statistic measured by the decrease in sum of squared
can be written in terms of the residuals
improvement in the fit of the (SSR).
regression. How can we -The improvement in the fit of the regression can be
measure this improvement in measured by the increase in the regression R^2
fit?
We would reject the null hypothesis if the sum of

Which of the following squared residuals (SSR) from the unrestricted
statements is true? regression is sufficiently smaller than that from the
restricted regression.
Econometric exam 2
Which of the following 1)

describes how to test the null Compute the standard errors, the t-statistic and the
hypotheses that either β1=0 or p-value for each, β1 and β2.
β2=0? Reject the null hypothesis if the p-value is less than
2) β1=0 and β2=0? some relevant significance level.
3) Suppose you want to test 2)
the null hypothesis that β1=0 Compute the standard errors, the correlation
and β2=0. between β1 and β2, the F-statistic, and the p-value
Is the result of the joint test associated with the F-statistic. Reject the null
implied by the result of the two hypothesis if the p-value is less than some relevant
separate tests? significance level.
3) No
The interpretation of the slope a 1% change in X is associated with a β1% change in

coefficient in the model Y.
ln (Yi) = B0 + B1 ln(Xi) + Ui
is as follows:
Suppose that you have data on A logarithmic regression function.

production and the factors of
production from a random
sample of firms with the same
Cobb-Douglas production
function. Which of the
following regression functions
provides the most useful
transformation to estimate the
model?
Econometric exam 2
You have estimated a linear -If adding a quadratic term, you could test the
regression model relating Y to hypothesis that the estimated coefficient of the
X. Your professor says, "I think quadratic term is significantly different from zero.
that the relationship between Y -Compare the fit between of linear regression to the
and X is nonlinear." How would non-linear regression model.
you test the adequacy of your
linear regression?
Suppose that you thought that ln(Q) = B0 + B1ln(K) + B2ln(L) + B3ln(M0 + B4[ln(L) x
the value of B2 was not ln(K)] + u
constant, but rather increased
when K increased. Which of the
following regression functions
captures this dynamic
relationship?
earcher tries to estimate the regression There is perfect multicollinearity between the
core i = regressors.
STRsmalli+β2STRmoderatei+β3STRlargei+ui
nds that her computer crashes. Why?
A polynomial regression model Yi = B0 + B1Xi + B2X^2i +...+ BrX^ri + mi

is specified as:
In the log-log model, the slope the elasticity of Y with respect to X.

coefficient indicates:
plot the estimated regression function and to

The best way to interpret
calculate the estimated effect on Y associated with
polynomial regressions is to:
a change in X for one or more values of X.
In the model ln(Yi)= B0 + B1Xi + B1X

mi, the elasticity of E (Y | X)
with respect to X is:
Econometric exam 2
Consider the polynomial H0: B2 = 0, B3 = 0, Br = 0 vs

regression model of degree r, H1: at least one Bj != 0, j = 2
According to the null
hypothesis that the regression
is linear and the alternative that
is a polynomial of degree r
corresponds to:
allows the population effect on log earnings of

The interaction term:
being married to depend on gender.
Which of the following A way is to check if the coefficients in the regression

statements describes a way of equation associated with the largest values of r are
determining the degree of the equal to zero.
polynomial in X which best
models a nonlinear regression?
Let r denote the highest power
of X that is included in the
regression.

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5/18/2021 Econometric exam 2 Flashcards | Quizlet

Home / Social Science / Economics / Econometrics

a variable that only takes the values 0 and 1.

The error term ui is homoskedastic if the variance of

does not affect the coefficient estimates (B hat),

1) measurement error in y and/or x

1) Plot the data (y and x)

How to correct for heterosk? We need to use heterosk-robust standard errors

If the regressor is correlated with a variable that has

1) a variable Z is correlated with an included

in pop. regression the number of included regressors

when one of the regressors in an exact linear

when the set of regressors includes a complete set

Measure of model fit: R- the portion of the variation in the dependent

accounts for the number of regressors, k, in our

estimator of standard deviation of ui

a regressor included to hold constant factors that, if

is used to test a joint hypothesis about regression

the distribution of the sum of m squared standard

Nonlinear regression function a function with a slope that is not constant.

-The effect on Y of a change in X depends on the

1) Identify a possible nonlinear relationship.

-Cannot use R2 or the adjusted R2 to compare

The error term is homoskedastic if the variance of

The OLS estimators remain unbiased, consistent,

If the errors are homoskedasticity-only

1. Average income per capita in the district. If this

2. The availability of computerized adaptive learning

3. The availability of computer-related leisure

A researcher plans to study the There are other important determinants of a

A researcher is interested in -Work experience.

A researcher is interested in -Excessive drug or alcohol use.

A recent study found that the -Type of employment.

Consider the multiple -omitted variable bias.

Consider the multiple if X1 and X2 are correlated.

Using the textbook example of use the heteroskedasticity-robust formula.

The adjusted R squared is 1- (n-1)/(n-k-1) x (SSR/TSS)

What degrees-of-freedom adjustment is required

Adjusted R^2 can be negative when the regressors,

In which of the following Perfect multicollinearity occurs when one of the

Why is it impossible to It is impossible to compute OLS estimators in the

Perfect multicollinearity can be independent variables

Under the least squares are unbiased and consistent.

-For the case of two regressors and

Suppose you are interested in -The number of teachers expressed as a percentage

-Intuitively, estimating the partial effect of X1

means that two or more of the regressors are highly

implies that it will be difficult to estimate precisely

Which of the following is the E(Ui | Xki....) = E(Ui | Wi....)

The dummy variable trap is an perfect multicollinearity.

In the multiple regression by dividing the estimate by its standard error.

The homoskedasticity-only F- different

The critical value of F 4, ∞ at 2.37

Which of the following -It modifies the "one-at-a-time" method so that it

We would reject the null hypothesis if the sum of

Which of the following 1)

The interpretation of the slope a 1% change in X is associated with a β1% change in

Suppose that you have data on A logarithmic regression function.

A polynomial regression model Yi = B0 + B1Xi + B2X^2i +...+ BrX^ri + mi

In the log-log model, the slope the elasticity of Y with respect to X.

plot the estimated regression function and to

In the model ln(Yi)= B0 + B1Xi + B1X