Question

Question 2 (1 point)

Suppose you want to estimate the impact of foreign aid on growth. A classmate suggests to you that foreign aid is often given as humanitarian aid after a natural disaster. If natural disasters lead to slower growth, what would happen to your estimate of foreign aid if you did not control for natural disasters?

Question 2 options:

	It would be positively biased.
	It is impossible to tell how it would be affected.
	It would not be affected since conditional mean independence still likely holds.
	It would be negatively biased.

Question 3 (1 point)

Conditional mean independence, i.e., E(u_i|X_1i,X_2i)=X_2i, implies:

Question 3 options:

	The conditional mean is also 0, i.e., E(ui|X1i,X2i)=0.
	X1 and X2 are not correlated.
	The coefficient on X1 is unbiased but the coefficient on X2 is likely to be biased.
	The coefficient on X2 is unbiased but the coefficient on X1 is likely to be biased.

Answer 1

Question 2:

If natural disasters lead to slower growth We can build a relation as

Growth co- c1* foreign aid

Where c₁ is the estimate of foriegn aid which is negative

Answer is : It would be negatively biased.

Question 3:

Conditional mean independence, i.e., E(u_i|X_1i,X_2i)=X_2i, implies X₁ and X₂ are not correlated.