MEcon Master of Economics Econometrics and Research Methods 1

Question 1

In ordinary least squares (OLS) regression, the estimator minimizes the sum of:

Accepted Answer

Squared residuals

Answer

OLS finds the regression coefficients that minimize the total squared vertical distance between observed data points and the fitted regression line.

Question 2

The Gauss-Markov theorem states that, under its classical assumptions, the OLS estimator is:

Accepted Answer

BLUE — Best Linear Unbiased Estimator

Answer

Given linearity, exogeneity, homoskedasticity, no autocorrelation, and no perfect multicollinearity, OLS produces the estimator with the smallest variance among all linear unbiased estimators.

Question 3

Omitted variable bias occurs when a relevant variable is excluded from a regression and that variable is:

Accepted Answer

Correlated with the error term and correlated with included regressors

Answer

When an omitted variable affects the dependent variable AND correlates with an included regressor, the OLS coefficient on that regressor absorbs the omitted effect and is biased.

Question 4

Heteroskedasticity in regression means that the variance of the error term:

Accepted Answer

Varies across observations

Answer

Heteroskedasticity violates the classical assumption of constant error variance, making standard OLS standard errors incorrect even though coefficients remain unbiased.

Question 5

Instrumental variable (IV) estimation is used to address:

Accepted Answer

Endogeneity caused by reverse causality or omitted variables

Answer

IV estimation uses an instrument — a variable correlated with the endogenous regressor but uncorrelated with the error — to isolate exogenous variation and obtain consistent estimates.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

MEcon Master of Economics Econometrics and Research Methods 1