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Suppose a variable Y depends upon some explanatory variables X2…..Xk in the following manner: Y = β

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MCQs on Econometrics, which is the use of statistical methods to develop theories or test existing hypotheses in economics or finance. 
 


Suppose a variable Y depends upon some explanatory variables X<sub>2</sub>…..X<sub>k</sub> in the following manner: Y = β<sub1</sub> + β<sub2</sub> X<sub2</sub> + β<sub3 </sub>X<sub3</sub> +…+ β<subk </sub>X<subk</sub> + u<br/>If for some reason, there is no data available on a certain variable, say X<sub>3</sub>, and a proxy variable Z that is linearly related to X3 is used instead, then X<sub>3</sub> = µ + αZ. The regression model is now rewritten as:<br/>Y = β<sub1</sub> + β<sub2</sub> X<sub2</sub> + β<sub3</sub>(µ+αZ)β<sub4 </sub>X<sub4</sub> +…+ β<subk </sub>X<subk</sub> + u<br> = (β<sub1</sub> + β<sub3</sub>µ) + β<sub2</sub> X<sub2</sub> + β<sub3</sub>αZ + β<sub4 </sub>X<sub4</sub>+…+ β<subk </sub>X<subk</sub> + u<br/>Which of the following statements about the model above is false?






 
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