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Suppose we have the following simple regression model with AR(1) disturbance:, where and is assumed to follow the OLS assumptions of zero expected value, constant variance, and no autocorrelation. The following algebra describes the steps that can eliminate the problem of AR(1) autocorrelation. Which of the answer choices explain why there is no autocorrelation in the equation resulting in the last step?Step 1: What holds true at time 't' also holds true at time.Step 2: Multiply both sides by p:.Step 3: Subtract the equation in step 2 from the original equation to get an equation free of autocorrelation: or rewrite as:, where =.

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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 we have the following simple regression model with AR(1) disturbance:<br><img src='https://www.fatskills.com/images2/GradExams/5FCFBA64-D5C4-4D6D-95B6-DDCE76543BE4.png' height='18' width='170'/>, where<br><img src='https://www.fatskills.com/images2/GradExams/65F9F460-86C3-4350-94E4-13C5FDBFEB04.png' height='19' width='128'/> and<br><img src='https://www.fatskills.com/images2/GradExams/A7224375-02E5-4E2E-8A38-A468A810FEAC.png' height='12' width='14'/> is assumed to follow the OLS assumptions of zero expected value, constant variance, and no autocorrelation. The following algebra describes the steps that can eliminate the problem of AR(1) autocorrelation. Which of the answer choices explain why there is no autocorrelation in the equation resulting in the last step?<br>Step 1: What holds true at time 't' also holds true at time<br><img src='https://www.fatskills.com/images2/GradExams/13E75941-182F-4DAD-9FE3-B56F1F44713B.png' height='20' width='290'/>.<br>Step 2: Multiply both sides by p:<br><img src='https://www.fatskills.com/images2/GradExams/B5348356-60F9-4E2D-87BB-34F4FC2B7F0B.png' height='19' width='261'/>.<br>Step 3: Subtract the equation in step 2 from the original equation to get an equation free of autocorrelation:<br><img src='https://www.fatskills.com/images2/GradExams/78C8A3BE-D230-46A2-9583-C7A0D91A9C17.png' height='20' width='460'/> or rewrite as:<br><img src='https://www.fatskills.com/images2/GradExams/4AE06F27-97ED-4359-868F-A73095482C81.png' height='20' width='388'/>, where =<br><img src='https://www.fatskills.com/images2/GradExams/1D299E3C-9B79-4C1E-8D5E-5713F44008D8.png' height='19' width='143'/>.





 
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