Question

The following statement is true or false. Brief with explanation.

a) Simultaneous equation regression models are models that take into account unidirectional relationships among variables.

b) It is often suggested that we use instrumental or proxy variables for variables suspected of having measurement errors.

Answer 1

a) Simultaneous equation regression models are models that take into account unidirectional relationships among variables - False

Unlike the a single-equation model where a dependent (y) variable is a function of independent (x) variables, there are other dependent variables among the explanatory variables. Bascially a back and forth causal relation can be observed.

A classic example is the demand and supply framework in economics where both have reciprocal effect on each other. i.e. demand determines supply and vice vesa

b) It is often suggested that we use instrumental or proxy variables for variables suspected of having measurement errors.- False

Proxy variables are used to measure immeasurable/categorical variables, and not variables that are suspected of having measurement errors. For a variable to have measurement error it must first be measurable and it should be noted that proxy variables are used for immeasurable variables. Hence the answer is false.

An example can be the intelligence/cognitive ability of an individual. We know this cannot be measured directly and hence we use GPA/test scores to get a proxy of the level of intelligence level of a person. Similarly per capita income is used as a proxy to measure standard of living