CEA - Certified Economic Analyst Quantitative Analysis and Econometrics Questions and Answers

Question 1

An econometrician is analyzing the impact of years of education and years of experience on an individual's wage.
They suspect that the error terms in their regression model have a non-constant variance, where the variance of the error term is larger for individuals with higher levels of education.
Which of the following econometric problems is most likely present in this model?

Accepted Answer

Heteroskedasticity

Answer

Autocorrelation

Answer

Multicollinearity

Answer

Omitted variable bias

Question 2

A researcher is building a multiple linear regression model to predict house prices. The model includes square footage, number of bedrooms, and number of bathrooms as independent variables. The researcher notices a very high correlation (r > 0.9) between the number of bedrooms and the number of bathrooms. What is the primary concern associated with this finding?

Accepted Answer

The estimated coefficients for the correlated variables may be unreliable.

Answer

The model will have a low R-squared value.

Answer

The intercept of the model will be biased.

Answer

The error terms will be serially correlated.

Question 3

In time-series analysis, which of the following models is most appropriate for a stationary series where the current value is dependent on a finite number of its own previous values and a current error term?

Accepted Answer

Autoregressive (AR) model

Answer

Moving Average (MA) model

Answer

Random Walk model

Answer

Exponential Smoothing model

Question 4

An analyst is studying the effect of a new fertilizer on crop yield. They regress crop yield on the amount of fertilizer used. However, they believe the amount of fertilizer used is correlated with the error term because farmers with better quality soil (an unobserved variable) tend to use more fertilizer. To address this issue, the analyst needs to find a variable that is correlated with fertilizer usage but does not directly affect crop yield, except through its effect on fertilizer usage. What is this type of variable called?

Accepted Answer

An instrumental variable

Answer

A dummy variable

Answer

A lagged variable

Answer

A confounding variable

Question 5

Which of the following is a potential consequence of omitting a relevant independent variable from a regression model?

Accepted Answer

The coefficients of the included independent variables may be biased.

Answer

The R-squared of the model will be artificially inflated.

Answer

The standard errors of the included variables' coefficients will be smaller.

Answer

The model will suffer from perfect multicollinearity.

Question 6

An economic analyst is tasked with forecasting quarterly sales for a retail company. The analyst observes that the sales data exhibits a clear upward trend over the years and a recurring pattern of peaks during the holiday season. Which of the following forecasting techniques is best suited to handle both trend and seasonality in the data?

Accepted Answer

Holt-Winters' method

Answer

Simple Linear Regression

Answer

Simple Exponential Smoothing

Answer

Autoregressive Integrated Moving Average (ARIMA)