School of Distance Education

University of Calicut
School of Distance Education

IV Semester MA Economics

Advanced Econometrics (ECO4 E01)

MULTIPLE CHOICE QUESTIONS

1.A causal effect of X on Y is defined as:
a. a non-zero correlation between X and Y
b. a positive relationship between X and Y
c. either positive, negative or non-linear relationship between X and Y
d. either a positive, negative or non-linear relationship between X and Y when all other
variables that affect Y are held constant
2. In the equation " Y = Bo + B1X + u " Bo is the ____________ an B1 is the ____________.
a. error term, slope
b. error term, intercept
c. intercept, slope
d. none of the above
3. In a simple linear regression equation, if X increases by 3:
a. Y increases by B1
b. Y increases by 3 * (Bo + B1)
c. Y increases by B1/3
d. none of the above
4. A negative covariant between X and Y implies that
a. as X increases, Y increases
b. there is no linear relationship between X and Y
c. -1 < Corr (X,Y) < 0
d. none of the above
5. The parameters of an econometric model _____.
a. include all unobserved factors affecting the variable being studied
b. describe the strength of the relationship between the variable under study and the
factors affecting it
c. refer to the explanatory variables included in the model
d. refer to the predictions that can be made using the model
6. Durbin Watson test is associated with:
a. Heteroscedasticity
b. Multicollinearity
c. Autocorrelation
d. Both a and c

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7. When is the problem of dummy variable trap occur?

a. When we take dummy variables more than the categories
b. When we take dummy variables less than the categories
c. When we take dummy variables equal to the no of categories
d. Both a and c
8. All are the types of specification errors EXCEPT:
a. Omission of relevant variable
b. Inclusion of unnecessary variable
c. errors of measurement
d. over identified
9. Which one is not the assumption of OLS?
a. Perfect Multicollinearity
b. zero covariance between error terms
c. equal variance of disturbances
d. Mean value of disturbances is
10. The coefficient of determination, r2 shows
a. Proportion of the variation in the dependent variable Y is explained by the independent
variable X
b. Proportion of the variation in the dependent variable X is explained by the independent
variable Y
c. Proportion of the variation in ui is explained by the independent variable X
d. Both a and c
11. The regression coefficient estimated in the presence of autocorrelation in the sample data are
NOT
a. Unbiased estimators
b. Consistent estimators
c. Efficient estimators
d. Linear estimators
12. A sure way of removing multicollinearity from the model is to
a. Work with panel data
b. Drop variables that cause multicollinearity in the first place
c. Transform the variables by first differencing them
d. Obtaining additional sample data
13. Individual respondents, focus groups, and panels of respondents are categorised as
a. Primary Data Sources
b. Secondary Data Sources
c. Itemized Data Sources
d. Pointed Data Sources
14. Homogeneity of three or more population correlation coefficients can be tested by
a. F-test
b. t-test
c. Z-test
d. χ2-test
15. Which one is equal to explained variation divided by total variation?
a. Sum of squares due to regression

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b. Coefficient of Determination
c. Standard Error of Estimate
d. Coefficient of Correlation
16. The successive trials are with replacement in
a. Hypergeometric distribution
b. Binomial distribution
c. Geometric distribution
d. None of these
17. Scaling a dependent variable in log form in the log-lin model will------------
a. change both the intercept and slope
b. change the slope but not the intercept
c. change the intercept but not the slope
d. intercept and slope both remains unchanged
18. Including relevant lagged values of the dependent variable on the right hand side of a
regression equation could lead to which one of the following?
a. Biased but consistent coefficient estimate
b. Biased and inconsistent coefficient estimate
c. Unbiased but inconsistent coefficient estimate
d. Unbiased and consistent but inefficient coefficient estimate
19. Micro numerosity in a regression model according to Goldberger refers to
a. A type of multicollinearity
. b. Sample size n being zero
c. Sample size n being slightly greater than the number of parameters to be estimated
d. Sample size n being just smaller than the number of parameters to be estimated
20. A sure way of removing multicollinearity from the model is to
a. Work with panel data
b. Drop variables that cause multicollinearity in the first place
c. Transform the variables by first differencing them
d. Obtaining additional sample data
21. When supply of a commodity, for example agricultural commodities, react to price with a lag
of one time period due to gestation period in production, such a phenomenon is referred to as
a. Lag phenomenon
b. Cobweb phenomenon
c. Inertia
d. Business cycle
22. A time series sample data is considered stationary if the following characteristics of the
series are time invariant:
a. Mean
b. Variance
c. Covariance
d. All of the above

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23. Locus of the conditional mean of the dependent variable for the fixed values of the
explanatory variable
a. Indifference curve
b. Population regression curve
c. Production Possibility curve
d. None of these.
24. The conditional mean of Y is
a. The expected value of Y for given values of the independent variables, Xi
b. The expected value of Y for given values of the independent variables, ui.
c. The expected value of Y for given values of the independent variables, Yi.
d. Both b and c
25. Information about numerical values of variables from period to period is
a. Time series data
b. Cross-section data
c. Pooled data
d. Panel data
26. The statistical properties of OLS estimators are
a. Linearity, Unbiasedness, and minimum variance
b. Linearity and Unbiasedness
c. Unbiasedness, and minimum variance
d. Linearity and minimum variance
27. Method of ordinary least square is attributed to
a. Carl Friedrick Gauss
b. William Sealy Goss
c. Durbin Watson
d. Both b and c
28. CLRM full form
a. Classical linear regression model...
b. Classical linear regression method
c. Classical linear relationship model
d. Classical linear relationship method
29. Assumptions under CLRM
a. Constant variance
b. Heteroscedasticity
c. Autocorrelation between the error terms
d. Autocorrelation between dependent and independent variable
30. Given the sample, each estimator will provide only a single point value of the relevant
population parameter is
a. Point estimator
b. Interval estimator

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c. Least square estimator

d. Both b and c
31. The end points of the confidence interval (ⱽβ2 + δ) are known as
a. Critical error
b. Confidence limit
c. Confidence value
d. Limiting value
32. In confidence interval estimation, α = 5%, this means that this interval includes the true β
with probability of
a.5%
b.50%
c. 95%
d. 45%
33. In Yi=E(Y/Xi) +ui, the non-systematic random component is given by
a. Yi
b. E(Y/Xi)
c. Ui
d. E(Y/Xi) + u
34. In Yi=E(Y/Xi) +ui, the deterministic component is given by
a. Yi
b. E(Y/Xi)
c. Ui
d. E(Y/Xi) + ui
35. Yi= β1+β2X+ui represents
a. Sample regression function
b. Population regression function
c. Nonlinear regression function
d. Estimate of regression function
36. Reliability of a point estimation is measured by its
a. Standard deviation
b. Standard normal curve
c. Standard error
d. Coefficient of determination
37. Assumption of CLRM
a. No Autocorrelation between error term
b. Positive correlation
c. Negative correlation
d. Both b and d are correct
38. When is the problem of dummy variable trap occur?
a. When we take dummy variables more than the categories

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b. When we take dummy variables less than the categories

c. When we take dummy variables equal to the no of categories
d. Both a and c
39. Consider a large population with a mean of 160 and a standard deviation of 25. A random
sample of size 64 is taken from this population. What is the standard deviation of the sample
mean?
a. 3.125
b. 2.5
c. 3.75
d. 5.625
40. Why is the number of dummy variables to be entered into the regression model always equal
to the number of groups (g) minus 1 (g-1)?
a. To avoid the model misspecification
b. To increase the R-squared value
c. To avoid the situation of perfect multicollinearity
d. To control for other variables in the model
41. How do we interpret a dummy variable coefficient?
a. The difference between two means
b. The difference between two coefficients
c. The difference between two R-square values
d. None of the above

42. Which of the following is incorrect?

a. Regression with one dummy variable (predictor) corresponds directly to an
independent analysis of variance (ANOVA)
b. Regression with more than one dummy variable including a covariate corresponds
directly to an independent analysis of covariance
(ANCOVA)
c. Regression with more than one dummy variable (predictor) corresponds directly to an
independent analysis of variance (ANOVA)
d. Regression with one dummy variable (predictor) corresponds directly to an
independent t-test
43. What does a multiple linear regression analysis examine?
a. The relationship between more than one dependent and only one independent
variable
b. The relationship between one or more than one dependent and only one independent
variable
c. The relationship between one dependent and more than one independent variables
d. The relationship between more than one independent variables
44. What does the following expression (H0: β1 = β2 = 0) mean?
a. One of the independent variables is useful in predicting the dependent
variable
b. Both of the independent variables are useful in predicting the dependent
variable

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c. None of the independent variables is useful in predicting the dependent

variable
d. There is a third independent variable predicting the dependent variable
45. Which of the following criteria is the most optimal for assessing the goodness of the fit of a
multiple linear regression model?
a. Adjusted R2
b. R2
c. The intercept
d. The coefficient
46. What is the post estimation command that you can use after the regress command in Stata to
compute the predicted mean-Y values of interest?
a. pcorr
b. esttab
c. margins
d. marginsplot
47. What does it mean when we say that our panel is balanced?
a. When we have more time periods than units
b. When we have a large sample of units
c. When we have an equal number of time periods per unit
d. When we have an unequal number of time periods per unit
48. How is the time-invariant independent variables and the unmeasured time-invariant variables
captured in a fixed effects model?
a. By running an ordinary least squares regression.
b. By running an ordinary least squares regression with robust standard errors.
c. By taking the mean of each variable for each unit across time, and running a
regression on the collapsed dataset of means.
d. By way of including unit dummy variables
49. What is the name of the statistical test that can help us determine whether to choose a fixed
effects or a random effects model?
a. Hausman test
b. z-test
c. chi square test
d. Link-Wallace test
50. Random effects is a weighted average between?
a. Pooled OLS and fixed effects
b. Pooled OLS and between effects
c. Between effects and fixed effects
d. Fixed effects and time fixed effects
51. What does non-stationarity mean?
a. That parameters of our data (such as the mean and variance) do not change over time
b. That parameters of our data (such as the mean and variance) do change over time
c. When time series data are not influenced by their historical values
d. When time series data are influenced by their historical values
52. What does lagging variables mean?
a. That we use previous values of a variable
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b. That we use future values of a variable

c. That we set all values at its mean across time
d. That we log transform the variable
53. Which of the following is not an oblique rotation technique?
a. Promax
b. Oblimax
c. Varimax
d. Quartimin
54. What will a factor loading in an orthogonal solution represent?
a. Correlation
b. Partial correlation
c. Multiple correlation
d. Eigenvalue
55. Which of the following is not a typical model fit index used in SEM?
a. Root mean squared error of approximation (RMSEA)
b. Adjusted R-square
c. Comparative fit index (CFI)
d. Tucker-Lewis index (TLI)
56. Which of the following estimation techniques are available for the estimation of over-
identified systems of simultaneous equations?
a. OLS
b. ILS
c. 2SLS
d. V
57. Which of the following are advantages of the VAR approach to modelling the relationship
between variables relative to the estimation of full structural models?
a. VARs receive strong motivation from financial and economic theory
b. VARs in their incresed forms can be used easily to produce time-series forecasts
c. VAR models are typically highly parsimonious
d. OLS can be applied separately to each equation in a reduced form VAR
58. How many parameters will be required to be estimated in total for all equations of a standard
form, unrestricted, tri-variate VAR(4), ignoring the intercepts?
a.36
b.4
c.12
d.81
59. Which of the following statements is true concerning variance decomposition analysis of
VARs?
a. Variance decompositions measure the impact of a unit shock to each of the variables
on the VAR
b. Variance decompositions can be thought of as measuring the proportion of the forecast
error variance that is attributable to each variable
c. The ordering of the variables is important for calculating impulse responses but not
variance decompositions
d. None of these

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60. Which of the following is not an example of a time series model?

a. Naive approach
b.Exponential smoothing
c.Moving Average
d.None of the above
61. Sum of weights in exponential smoothing is _____.
a.<1
b. 1
c.>1
d.None of the above
62. Which of the following is not a necessary condition for weakly stationary time series?
a. Mean is constant and does not depend on time
b. Autocovariance function depends on s and t only through their difference |s-t| (where t
and s are moments in time)
c. The time series under considerations is a finite variance process
d. Time series is Gaussian
63. Autocovariance function for weakly stationary time series does not depend on _______ ?
a. Separation of xs and xt
b. h = | s – t |
c. Location of point at a particular time
d. None
64. In autoregressive models _______ ?
a. Current value of dependent variable is influenced by current values of independent
variables
b. Current value of dependent variable is influenced by current and past values of
independent variables
c. Current value of dependent variable is influenced by past values of both dependent and
independent variables
d.None of the above
65. For the following MA (3) process yt = μ + Εt + θ1Εt-1 + θ2Εt-2 + θ3Εt-3 , where σt is a zero
mean white noise process with variance σ2
a. ACF = 0 at lag 3
b. ACF =0 at lag 5
c. ACF =1 at lag 1
d. ACF =0 at lag 2
66. Consider the following AR(1) model with the disturbances having zero mean and unit
variance. yt= 0.4 + 0.2yt-1+ut. The (unconditional) variance of y will be given by ?
a. 1.5
b.1.04
c.0.5
d.2
67. Second differencing in time series can help to eliminate which trend?
a. Quadratic Trend
b. Linear Trend

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c. Both A & B
d. None of the above
68. Suppose that we wished to evaluate the factors that affected the probability that an investor
would choose an equity fund rather than a bond fund or a cash investment. Which class of model
would be most appropriate?
a. Logit model
b. Mutlinominal model
c. Tobit model
d. Ordered logit model
69. Econometrics is the branch of economics that _____.
a. studies the behavior of individual economic agents in making economic decisions
b. develops and uses statistical methods for estimating economic relationships
c. deals with the performance, structure, behavior, and decision-making of an economy as
a whole
d. applies mathematical methods to represent economic theories and solve economic
problems.
70. The parameters of an econometric model _____.
a. include all unobserved factors affecting the variable being studied
b. describe the strength of the relationship between the variable under study and the
factors affecting it
c. refer to the explanatory variables included in the model
d. refer to the predictions that can be made using the model
71. A data set that consists of a sample of individuals, households, firms, cities, states, countries,
or a variety of other units, taken at a given point in time, is called a _____.
a. cross-sectional data set
b. longitudinal data set
c. time series data set
d. experimental data set
72. A data set that consists of observations on a variable or several variables over time is called a
_____ data set
a.binary
b. cross-sectional
c. time series
d. experimental
73. Which of the following refers to panel data?
a. Data on the unemployment rate in a country over a 5-year period
b. Data on the birth rate, death rate and population growth rate in developing countries
over a 10-year period.
c. Data on the income of 5 members of a family on a particular year.
d. Data on the price of a company’s share during a year.
74. If a change in variable x causes a change in variable y, variable x is called the _____.
a. dependent variable
b. explained variable
c. explanatory variable
d. response variable

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75. If the total sum of squares (SST) in a regression equation is 81, and the residual sum of
squares (SSR) is25, what is the explained sum of squares (SSE)?
a. 64
b. 56
c. 32
d. 18
76. Which of the following is a nonlinear regression model?
a. y = β0 + β1x1/2 + u
b. log y = β0 + β1log x +u
c. y = 1 / (β0 + β1x) + u
d. y = β0 + β1x + u
77. Which of the following is assumed for establishing the unbiasedness of Ordinary Least
Square (OLS) estimates?
a. The error term has an expected value of 1 given any value of the explanatory variable.
b. The regression equation is linear in the explained and explanatory variables.
c. The sample outcomes on the explanatory variable are all the same value.
d. The error term has the same variance given any value of the explanatory variable.
78. If an independent variable in a multiple linear regression model is an exact linear
combination of other independent variables, the model suffers from the problem of _____.
a. perfect collinearity
b. homoskedasticity
c. heteroskedasticty
d. omitted variable bias
79. The term _____ refers to the problem of small sample size.
a. Micronumerosity
b. Multicollinearity
c. Homoskedasticity
d. Heteroskedasticity
80. Which of the following statements is true?
a. Taking a log of a nonnormal distribution yields a distribution that is closer to normal.
b. The mean of a nonnormal distribution is 0 and the variance is σ2.
c. The CLT assumes that the dependent variable is unaffected by unobserved factors.
d. OLS estimators have the highest variance among unbiased estimators.
81. Which of the following statements is true of confidence intervals?
a. Confidence intervals in a CLM are also referred to as point estimates.
b. Confidence intervals in a CLM provide a range of likely values for the population
parameter.
c. Confidence intervals in a CLM do not depend on the degrees of freedom of a
distribution.
d. Confidence intervals in a CLM can be truly estimated when heteroskedasticity is
present.
82. Which of the following tools is used to test multiple linear restrictions?
a. t test
b. z test
c. F test

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d. Unit root test

83. Which of the following statements is true when the dependent variable, y > 0?
a. Taking log of a variable often expands its range.
b. Models using log(y) as the dependent variable will satisfy CLM assumptions more
closely than models
using the level of y.
c. Taking log of variables make OLS estimates more sensitive to extreme values.
d. Taking logarithmic form of variables make the slope coefficients more responsive to
rescaling.
84. Which of the following is true of dummy variables?
a. A dummy variable always takes a value less than 1.
b. A dummy variable always takes a value higher than 1.
c. A dummy variable takes a value of 0 or 1.
d. A dummy variable takes a value of 1 or 10.
85. Which of the following Gauss-Markov assumptions is violated by the linear probability
model?
a. The assumption of constant variance of the error term.
b. The assumption of zero conditional mean of the error term.
c. The assumption of no exact linear relationship among independent variables.
d. The assumption that none of the independent variables are constants.
86. Which of the following is true?
a. In ordinary least squares estimation, each observation is given a different weight.
b. In weighted least squares estimation, each observation is given an identical weight.
c. In weighted least squares estimation, less weight is given to observations with a higher
error variance.
d. In ordinary least squares estimation, less weight is given to observations with a lower
error variance.
87. Consider the following regression equation: y=β0+β1x1+u. Which of the following indicates
a functional form misspecification in E(y|x)?
a. Ordinary Least Squares estimates equal Weighted Least Squares estimates.
b. Ordinary Least Squares estimates exceed Weighted Least Squares estimates by a small
magnitude.
c. Weighted Least Squares estimates exceed Ordinary Least Squares estimates by a small
magnitude.
d. Ordinary Least Square estimates are positive while Weighted Least Squares estimates
are negative.

88. A proxy variable _____.

a. increases the error variance of a regression model
b. cannot contain binary information
c. is used when data on a key independent variable is unavailable
d. is detected by running the Davidson-MacKinnon test
89. A measurement error occurs in a regression model when _____.
a. the observed value of a variable used in the model differs from its actual value

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b. the dependent variable is binary

c. the partial effect of an independent variable depends on unobserved factors
d. the model includes more than two independent variables
90. Which of the following is a difference between least absolute deviations (LAD) and ordinary
least squares (OLS) estimation?
a. OLS is more computationally intensive than LAD.
b. OLS is more sensitive to outlying observations than LAD.
c. OLS is justified for very large sample sizes while LAD is justified for smaller sample
sizes.
d. OLS is designed to estimate the conditional median of the dependent variable while
LAD is designed to estimate the conditional mean.
91. A regression model exhibits unobserved heterogeneity if _____.
a. there are unobserved factors affecting the dependent variable that change over time
b. there are unobserved factors affecting the dependent variable that do not change over
time
c. there are unobserved factors which are correlated with the observed independent
variables
d. there are no unobserved factors affecting the dependent variable
92. Which of the following assumptions is required to obtain a first-differenced estimator in a
two-period panel data analysis?
a. The explanatory variable does not change over time for any cross-sectional unit.
b. The explanatory variable changes by the same amount in each time period.
c. The variance of the error term in the regression model is not constant.
d. The idiosyncratic error at each time period is uncorrelated with the explanatory
variables in both time periods.
93. The assumption of “strict exogeneity” in a regression model means that _____
a. the dependent variable is binary
b. all explanatory variables change over time
c. the model does not include a lagged dependent variable as a regressor
d. the model includes all relevant explanatory variables
94. A data set is a balanced panel if it _____.
a. consists of a sample of individuals, households, firms, cities, states, countries, or a
variety of other units, taken at a given point in time.
b. consists of observations on a variable or several variables over time
c. consists of data for each cross sectional unit over the same time period
d. consists of time-demeaned data for different cross sectional units
95. A pooled OLS estimator that is based on the time-demeaned variables is called the _____.
a. random effects estimator
b. fixed effects estimator
c. least absolute deviations estimator
d. instrumental variable estimator
96. Which of the following is a property of dummy variable regression?
a. This method is best suited for panel data sets with many cross-sectional observations.
b. The R-squared obtained from this method is lower than that obtained from regression
on time-demaned data.

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c. The degrees of freedom cannot be computed directly with this method.

d. The major statistics obtained from this method are identical to that obtained from
regression on time-demaned data.
97. The estimator obtained through regression on quasi-demeaned data is called the _____.
a. random effects estimator
b. fixed effects estimator
c. hetroskedasticity-robust OLS estimator
d. instrumental variables estimator
98. Consider the following simple regression model y=β0 + β1x1 + u. Suppose z is an instrument
for x. Which of the following statements is true?
a. The condition Cov(z,u) = 0 can be tested statistically.
b. The condition Cov(z,x) ≠ 0 cannot be tested statistically.
c. The instrumental variables estimator is always biased if Cov(x,u)≠0.
d. The ordinary least squares estimator is unbiased if Cov(x,u)≠0.
99. The necessary condition for identification of an equation is called the _____.
a. order condition
b. rank condition
c. condition of instrumental exogeneity
d. the condition of instrumental relevance.
100. Which of the following is the first step in empirical economic analysis?
a. Collection of data
b. Statement of hypotheses
c. Specification of an econometric model
d. Testing of hypotheses

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Answers

1. d
2. c
3. d
4. c
5. b
6. c
7. d
8. d
9. a
10. a
11. c
12. b
13. a
14. d
15. b
16. b
17. c
18. a
19. c
20. b
21. b
22. d
23. b
24. a
25. a
26. a
27. a
28. a
29. a
30. a
31. c
32. c
33. c
34. b
35. b
36. c
37. a
38. d

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39. a
40. c
41. a
42. a
43. c
44. c
45. a
46. c
47. c
48. d
49. a
50. c
51. b
52. a
53. c
54. a
55. b
56. c
57. d
58. a
59. b
60. d
61. b
62. d
63. c
64. c
65. b
66. b
67. a
68. b
69. b
70. b
71. a
72. c
73. b
74. c
75. b
76. c
77. d
78. a

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79. a
80. a
81. b
82. c
83. b
84. c
85. a
86. c
87. d
88. c
89. a
90. b
91. b
92. d
93. c
94. c
95. b
96. d
97. a
98. c
99. a

100.c

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