Question

1.Idiosyncratic error is the error that occurs due to _____.

	a.	unobserved factors that affect the dependent variable and change over time
	b.	unobserved factors that affect the dependent variable and do not change over time
	c.	incorrect measurement of an economic variable
	d.	correlation between the independent variables

2.Which of the following is a reason for using independently pooled cross sections?

	a.	To increase the sample size
	b.	To select a sample based on the dependent variable
	c.	To select a sample based on the independent variable
	d.	To obtain data on same cross sectional units

3.Which of the following assumptions is needed for the usual standard errors to be valid when differencing with more than two time periods?

	a.	The regression model includes a lagged independent variable.
	b.	The regression model exhibits heteroskedasticty.
	c.	The differenced idiosyncratic error or ∆ uit is uncorrelated over time.
	d.	The unobserved factors affecting the dependent variable are time-constant.

Answer 1

1) OPTION A is correct

diosyncratic error is the error that occurs due to un observed factors that affect the dependent variable and change over time.

2) OPTION B

The reason for using independently pooled cross sections is to select a sample based on the dependent variable

3) OPTION A

The regression model includes a lagged independent variable