1

8. A type I error is
a) failing to reject the null when it is false
b) rejecting the null when it is true
9. The probability of a type I error is determined by
a) the researcher
b) the sample size
c) the degree of falsity of the null hypothesis
d) both b) and c) above

10. A type II error is

a) failing to reject the null when it is false
b) rejecting the null when it is true

11. The probability of a type II error is determined by

a) the researcher
b) the sample size
c) the degree of falsity of the null hypothesis
d) both b) and c) above

12. Hypothesis testing is based on

a) minimizing the type I error
b) minimizing the type II error
c) minimizing the sum of type I and type II errors
d) none of these

13. A power curve graphs the degree of falseness of the null against
a) the type I error probability
b) the type II error probability
c) one minus the type I error probability
d) one minus the type II error probability

14. When the null is true the power curve measures

a) the type I error probability
b) the type II error probability
c) one minus the type I error probability
d) one minus the type II error probability

15. Other things equal, when the sample size increases the power curve
a) flattens out
b) becomes steeper
c) is unaffected

16. Other things equal, when the type I error probability is increased the power curve
a) shifts up b) shifts down c) is unaffected
 2

17. The power of a test statistic should become larger as the

a) sample size becomes larger
b) type II error becomes larger
c) null becomes closer to being true
d) significance level becomes smaller

18. A manufacturer has had to recall several models due to problems not discovered with
its random final inspection procedures. This is an example of
a) a type I error b) a type II error c) both types of error d) neither type of error

19 . As the sample size becomes larger, the type I error

probability a) increases b) decreases c) does not change d) can’t
tell

20 . Consider the following two statements: a) If you reject a null

using a one-tailed test, then you will also reject it using a two-tailed
test at the same significance level; b) For a given level of
significance, the critical value of t gets closer to zero as the sample
size increases.
a) both statements are true b) neither statement is true
c) only the first statement is true d) only the second statement is true

21 . Power is the probability of making the right decision when a)

the null is true
b) the null is false
c) the null is either true or false
d) the chosen significance level is 100%

22 . The p value is
a) the power b) one minus the power c) the type II error d) none of the above

23 . After running a regression, the Eviews software contains

a) the residuals in the resid vector and the constant (the intercept) in the c vector
b) the residuals in the resid vector and the parameter estimates in the c vector
c) the squared residuals in the resid vector and the constant in the c vector
d) the squared residuals in the resid vector and the parameter estimates in the c vector

Week 3: What is Regression Analysis?

1. In the regression specification y = α + βx + ε

a) y is called the dependent variable or the regressand, and x is called the
regressor
b) y is called the dependent variable or the regressor, and x is called the regressand
c) y is called the independent variable or the regressand, and x is called the regressor
d) y is called the independent variable or the regressor, and x is called the regressand
 3

2. In the regression specification y = α + βx + ε

a) α is called the intercept, β is called the slope, and ε is called the residual
b) α is called the slope, β is called the intercept, and ε is called the residual
c) α is called the intercept, β is called the slope, and ε is called the error
d) α is called the slope, β is called the intercept, and ε is called the error

3. In the regression specification y = α + βx + ε which of the following is not a

justification for epsilon
a) it captures the influence of a million omitted explanatory variables
b) it incorporates measurement error in x
c) it reflects human random behavior
d) it accounts for nonlinearities in the functional form

4. In the regression specification y = α + βx + ε if the expected value of epsilon is a fixed

number but not zero
a) the regression cannot be run
b) the regression is without a reasonable interpretation
c) this non-zero value is accommodated by the βx term
d) this non-zero value is incorporated into α

5. In the regression specification y = α + βx + ε the conditional expectation of y is

a) the average of the sample y values
b) the average of the sample y values corresponding to a specific x value
c) α + βx d) α + βx + ε

6.7. In the regression specification y = α + βx + δz + ε the parameter β is interpreted as

the amount by which y changes when x increases by one and
a) z does not change
b) z changes by one
c) z changes by the amount it usually changes whenever x increases by one
d) none of the above
8. In the regression specification y = α + βx + δz + ε the parameter α is called
a) the slope coefficient
b) the intercept
c) the constant term
d) both b) and c) above

9. The terminology ceteris paribus means

a) all else equal
b) changing everything else by the amount by which they usually change
c) changing everything else by equal amounts
 4

d) none of the above

16. R-square is the fraction of
a) the dependent variable explained by the independent variables
b) the variation in the dependent variable explained by the independent variables
c) the variation in the dependent variable explained linearly by the independent
variables
17. Obtaining a negative R-square probably means that
a) the computer made a calculation error
b) the true functional form is not linear
c) an intercept was omitted from the specification
d) the explanatory variable ranged too widely

18. Maximizing R-square creates

a) a better fit than minimizing the sum of squared errors
b) an equivalent fit to minimizing the sum of squared errors
c) a worse fit than minimizing the sum of squared errors

19 . When there are more explanatory variables the adjustment of R-square to create
adjusted R-square is
a) bigger b) smaller c) unaffected

20. Compared to estimates obtained by minimizing the sum of absolute errors, OLS
estimates are _______ to outliers. The blank is best filled with
a) more sensitive b) equally sensitive c) less sensitive

21. The popularity of OLS is due to the fact that it

a) minimizes the sum of squared errors
b) maximizes R-square
c) creates the best fit to the data
d) none of these

22 . R-squared is
a) The minimized sum of squared errors as a fraction of the total sum of squared errors.
b) The sum of squared errors as a fraction of the total variation in the dependent
variable.
c) One minus the answer in a).
d) One minus the answer in b).

23 . You have 46 observations on y (average value 15) and on x (average value 8) and
from an OLS regression have estimated the slope of x to be 2.0. Your estimate of the
mean of y conditional on x is
a) 15 b) 16 c) 17 d) none of the above

33. The variance of the error term in a regression is

a) the average of the squared residuals
b) the expected value of the squared error term
 5

c) SSE divided by the sample size

d) none of these

36 . The standard error of regression is

a) the square root of the variance of the error term
b) an estimate of the square root of the variance of the error term
c) the square root of the variance of the dependent variable
d) the square root of the variance of the predictions of the dependent variable

37 . Asymptotics refers to what happens when a)

the sample size becomes very large
b) the sample size becomes very small
c) the number of explanatory variables becomes very large
d) the number of explanatory variables becomes very small

38 . The first step in an econometric study should be to

a) develop the specification
b) collect the data
c) review the literature
d) estimate the unknown parameters

4: The CLR Model

2. Suppose y=AKαLβ. Then ceteris paribus
a) α is the change in y per unit change in K
b) α is the percentage change in y per unit change in K
c) α is the percentage change in y per percentage change in K
d) α is none of the above because it is an elasticity

3. Suppose we are estimating the production function y=AeθtKαLβ. Then θ is interpreted

as
a) the returns to scale parameter
b) the rate of technical change
c) an elasticity
d) an intercept

4.
5. Suppose you regress y on x and the square of x.
a) Estimates will be unreliable
b) It doesn’t make sense to use the square of x as a regressor
c) The regression will not run because these two regressors are perfectly correlated
d) There should be no problem with this.
6 . The acronym CLR stands for a)
constant linear regression
 6

b) classical linear relationship

c) classical linear regression
d) none of these

7 . The first assumption of the CLR model is that a)

the functional form is linear
b) all the relevant explanatory variables are included
c) the expected value of the error term is zero
d) both a) and b) above
8. Consider the two specifications y = α + βx-1 + ε and y = Axθ + ε.
a) both specifications can be estimated by a linear regression
b) only the first specification can be estimated by a linear regression
c) only the second specification can be estimated by a linear regression
d) neither specification can be estimated by a linear regression

10. The most common functional form for estimating wage equations is
a) Linear
b) Double log
c) semilogarithmic with the dependent variable logged
d) semilogarithmic with the explanatory variables logged

11. As a general rule we should log variables

a) which vary a great deal
b) which don’t change very much
c) for which changes are more meaningful in absolute terms
d) for which changes are more meaningful in percentage terms

12. In the regression specification y = α + βx + δz + ε the parameter α is usually

interpreted as
a) the level of y whenever x and z are zero
b) the increase in y whenever x and z increase by one
c) a meaningless number that enables a linear functional form to provide a good
approximation to an unknown functional form
d) none of the above

13. To estimate a logistic functional form we transform the dependent variable to

a) its logarithm b) the odds ratio c) the log odds ratio d) none of these

14. The logistic functional form

a) forces the dependent variable to lie between zero and one
b) is attractive whenever the dependent variable is a probability
c) never allows the dependent variable to be equal to zero or one
d) all of the above

15. Whenever the dependent variable is a fraction, using a linear functional form is OK if
a) most of the dependent variable values are close to one
 7

b) most of the dependent variable values are close to zero

c) most of the dependent variable values are close to either zero or one
d) none of the dependent variable values are close to either zero or one
16. Violation of the CLR assumption that the expected value of the error is zero is a
problem only if this expected value is
a) negative
b) constant
c) correlated with an explanatory variable
d) uncorrelated with all explanatory variables

17. Nonspherical errors refers to

a) heteroskedasticity
b) autocorrelated errors
c) both a) and b)
d) expected value of the error not equal to zero

18. Heteroskedasticity is about

a) errors having different variances across observations
b) explanatory variables having different variances across observations
c) different explanatory variables having different variances
d) none of these

19. Autocorrelated errors is about

a) the error associated with one observation not being independent of the error
associated with another observation
b) an explanatory variable observation not being independent of another observation’s
value of that same explanatory variable
c) an explanatory variable observation not being independent of observations on other
explanatory variables
d) the error is correlated with an explanatory variable

20. Suppose your specification is that y = α + βx + ε where β is positive. If x and ε are

positively correlated then OLS estimation will
a) probably produce an overestimation of β
b) probably produce an underestimation of β
c) be equally likely to overestimate or underestimate β

21. Correlation between the error term and an explanatory variable can arise because
a) of error in measuring the dependent variable
b) of a constant non-zero expected error
c) the equation we are estimating is part of a system of simultaneous equations d)
of multicollinearity
 8

22. Multicollinearity occurs when

a) the dependent variable is highly correlated with all of the explanatory variables
b) an explanatory variable is highly correlated with another explanatory variable
c) the error term is highly correlated with an explanatory variable
d) the error term is highly correlated with the dependent variable
23. In the specification wage = βEducation + δMale + θFemale + ε
a) there is perfect multicollinearity
b) the computer will refuse to run this regression
c) both a) and b) above
d) none of the above

24. In the CNLR model

a) the errors are distributed normally
b) the explanatory variables are distributed normally
c) the dependent variable is distributed normally

Week 5: Sampling Distributions

1. A statistic is said to be a random variable because

a) its value is determined in part by random events
b) its variance is not zero
c) its value depends on random errors
d) all of the above

2. A statistic’s sampling distribution can be pictured by drawing a

a) histogram of the sample data
b) normal distribution matching the mean and variance of the sample data
c) histogram of this statistic calculated from the sample data
d) none of the above

3. An example of a statistic is
a) a parameter estimate but not a t value or a forecast
b) a parameter estimate or a t value, but not a forecast
c) a parameter estimate, a t value, or a forecast
d) a t value but not a parameter estimate or a forecast

4. The value of a statistic calculated from our sample can be viewed as

a) the mean of that statistic’s sampling distribution
b) the median of that statistic’s sampling distribution
 9

c) the mode of that statistic’s sampling distribution

d) none of the above

5.
7. A Monte Carlo study is
a) used to learn the properties of sampling distributions
b) undertaken by getting a computer to create data sets consistent with the econometric
specification
c) used to see how a statistic’s value is affected by different random drawings of the
error term
d) all of the above

8. Knowing what a statistic’s sampling distribution looks like is important because

a) we can deduce the true value of an unknown parameter
b) we can eliminate errors when testing hypotheses
c) our sample value of this statistic is a random drawing out of this distribution d)
none of the above

9. We should choose our parameter estimator based on

a) how easy it is to calculate
b) the attractiveness of its sampling distribution
c) whether it calculates a parameter estimate that is close to the true parameter value d)
none of the above

10. We should choose our test statistic based on

a) how easy it is to calculate
b) how closely its sampling distribution matches a distribution described in a statistical
table
c) how seldom it makes mistakes when testing hypotheses
d) how small is the variance of its sampling distribution

11. An unbiased estimator is an estimator whose sampling distribution has

a) mean equal to the true parameter value being estimated
b) mean equal to the actual value of the parameter estimate
c) a zero variance
d) none of the above

b)
c)
d)
 10

12. Suppose we estimate an unknown parameter with the value 6.5, ignoring the data.
This estimator
a) has minimum variance
has zero variance is
biased all of the above
13. MSE stands for
a) minimum squared error
b) minimum sum of squared errors
c) mean squared error
d) none of the above
14. A minimum variance unbiased estimator
a) is the same as the MSE estimator
b) has the smallest variance of all estimators
c) has a very narrow sampling distribution
d) none of the above

15. In the CLR model the OLS estimator is popular because

a) it minimizes the sum of squared errors
b) it maximizes R-squared
c) it is the best unbiased estimator
d) none of the above

16. Betahat is the minimum MSE estimator if it minimizes

a) the sum of bias and variance
b) the sum of bias squared and variance squared
c) the expected value of the square of the difference between betahat and the mean of
betahat
d) the expected value of the square of the difference between betahat and the true
parameter value

17. A minimum MSE estimator

a) trades off bias and variance
b) is used whenever it is not possible to find an unbiased estimator with a small variance
c) is identical to the minimum variance estimator whenever we are considering only
unbiased estimators
d) all of the above

18. Econometric theorists are trained to

a) find estimators with good sampling distribution properties

b)
c)
d)
 11

b) find test statistics with known sampling distributions when the null hypothesis is true
c) use asymptotic algebra
d) all of the above

19. The OLS estimator is not used for all estimating situations because
a) it is sometimes difficult to calculate it
doesn’t always minimize R-squared
it doesn’t always have a good-looking sampling distribution sometimes
other estimators have better looking sampling distributions
20. The traditional hypothesis testing methodology is based on whether
a) the data support the null hypothesis more than the alternative hypothesis
b) it is more likely that the test statistic value came from its null-is-true sampling
distribution or its null-is-false sampling distribution
c) the test statistic value is in the tail of its null-is-true sampling distribution
d) the test statistic value is in the tail of its null-is-false sampling distribution
Week 6: Dummy Variables

1. The dummy variable trap occurs when

a) a dummy is not defined as zero or one
b) there is more than one type of category using dummies
c) the intercept is omitted
d) none of the above

The next 13 questions are based on the following information. Suppose we specify that y
= α + βx + δ1Male + δ2Female + θ1Left + θ2Center + θ3Right + ε where Left, Center,
and Right refer to the three possible political orientations. A variable Fringe is created as
the sum of Left and Right, and a variable x*Male is created as the product of x and Male.

2. Which of the following creates a dummy variable trap? Regress y on an intercept, x, a)

Male and Left
b) Male, Left, and Center
c) Left, Center, and Right
d) None of these

3. Which of the following creates a dummy variable trap? Regress y on an intercept, x, a)

Male and Fringe
b) Male, Center, and Fringe.
c) Both of the above
d) None of the above

b)
c)
d)
 12

4. The variable Fringe is interpreted as

a) being on the Left or on the Right
b) being on both the Left and the Right
c) being twice the value of being on the Left or being on the Right
d) none of these

5. Using Fringe instead of Left and Right separately in this specification is done to force
the slopes of Left and Right to be
a) the same half the slope of
Center twice the slope of
Center the same as the slope of
Center

b)
c)
d)
 13

6. If we regress y on an intercept, x, Male, Left, and Center, the slope coefficient on

Male is interpreted as the intercept difference between males and females
a) regardless of political orientation
b) assuming a Right political orientation
c) assuming a Left or Center political orientation
d) none of the above
7. If we regress y on an intercept, x, Male, and x*Male the slope coefficient on x*Male is
interpreted as
a) the difference between the male and female intercept
b) the male slope coefficient estimate
c) the difference between the male and female slope coefficient estimates
d) none of these

8. Suppose we regress y on an intercept, x, and Male, and then do another regression,

regressing y on an intercept, x, and Female. The slope estimates on Male and on
Female should be
a) equal to one another
b) equal but opposite in sign
c) bear no necessary relationship to one another
d) none of these

9. Suppose we regress y on an intercept, x, Male, Left and Center and then do another
regression, regressing y on an intercept, x, and Center and Right. The interpretation of
the slope estimate on Center should be
a) the intercept for those from the political center in both regressions
b) the difference between the Center and Right intercepts in the first regression,
and the difference between the Center and Left intercepts in the second
regression
c) the difference between the Center and Left intercepts in the first regression, and the
difference between the Center and Right intercepts in the second regression d) none
of these

10. Suppose we regress y on an intercept, x, Male, Left and Center and then do another
regression, regressing y on an intercept, x, and Center and Right. The slope estimate
on Center in the second regression should be
a) the same as the slope estimate on Center in the first regression
b) equal to the difference between the original Center coefficient and the Left
coefficient
c) equal to the difference between the original Center coefficient and the Right
coefficient
d) unrelated to the first regression results
 14

11. Suppose we regress y on an intercept, Male, Left, and Center. The base category is
a) a male on the left

b) a female on the left

c) a male on the right
d) a female on the right

12. Suppose we regress y on an intercept, Male, Left, and Center. The intercept is
interpreted as the intercept of a
a) male
b) male on the right
c) female
d) female on the right
14. In the preceding question, the base categories for specifications A and B are,
respectively,
a) male on the right and female on the right
b) male on the right and female on the left
c) female on the right and female on the right
d) female on the right and male on the right

15. Analysis of variance is designed to

a) estimate the influence of different categories on a dependent variable
b) test whether a particular category has a nonzero influence on a dependent variable
c) test whether the intercepts for all categories in an OLS regression are the same
d) none of these

16 . Suppose you have estimated wage = 5 + 3education + 2gender, where gender is

one for male and zero for female. If gender had been one for female and zero for male,
this result would have been a) Unchanged b) wage = 5 + 3education - 2gender
c) wage = 7 + 3education + 2gender
d) wage = 7 + 3education - 2gender

a)
Week 7: Hypothesis Testing

1. The square root of an F statistic is distributed as a t statistic. This statement is

a) true b) true only under special conditions c) false

2. To conduct a t test we need to

a) divide a parameter estimate by its standard error
 15

b) estimate something that is supposed to be zero and see if it is zero

c) estimate something that is supposed to be zero and divide it by its standard
error

3. If a null hypothesis is true, when we impose the restrictions of this null the minimized
sum of squared errors

a) becomes smaller b) does not change c) becomes bigger

d) changes in an indeterminate fashion

4. If a null hypothesis is false, when we impose the restrictions of this null the minimized
sum of squared errors
a) becomes smaller b) does not change c) becomes bigger
e) changes in an indeterminate fashion

5. Suppose you have 25 years of quarterly data and specify that demand for your product
is a linear function of price, income, and quarter of the year, where quarter of the year
affects only the intercept. You wish to test the null that ceteris paribus demand is the
same in spring, summer, and fall, against the alternative that demand is different in all
quarters. The degrees of freedom for your F test are
a) 2 and 19 b) 2 and 94 c) 3 and 19 d) 3 and 94

6. In the preceding question, suppose you wish to test the hypothesis that the entire
relationship (i.e., that the two slopes and the intercept) is the same for all quarters,
versus the alternative that the relationship is completely different in all quarters. The
degrees of freedom for your F test are
a) 3 and 94 b) 6 and 88 c) 9 and 82 d) none of these

7. In the preceding question, suppose you are certain that the intercepts are different
across the quarters, and wish to test the hypothesis that both slopes are unchanged
across the quarters, against the alternative that the slopes are different in each quarter.
The degrees of freedom for your F test are
a) 3 and 94 b) 6 and 88 c) 9 and 82 d) none of these

8. As the sample size becomes very large, the t distribution

a) collapses to a spike because its variance becomes very small
b) collapses to normally-distributed spike
c) approximates more and more closely a normal distribution with mean one
d) approximates more and more closely a standard normal distribution
10. After running a regression, to find the covariance between the first and second slope
coefficient estimates we
a) calculate the square root of the product of their variances
 16

b) look at the first off-diagonal element of the correlation matrix

c) look at the first diagonal element of the variance-covariance matrix
d) none of these

Week 9: Specification

1. Specification refers to choice of

a) test statistic
b) estimating procedure

c) functional form and explanatory variables

d) none of these

2. Omitting a relevant explanatory variable when running a regression

a) never creates bias
b) sometimes creates bias
c) always creates bias

3. Omitting a relevant explanatory variable when running a regression usually

a) increases the variance of coefficient estimates
b) decreases the variance of coefficient estimates
c) does not affect the variance of coefficient estimates

4. Suppose that y = α + βx + δw + ε but that you have ignored w and regressed y on only
x. If x and w are negatively correlated in your data, the OLS estimate of β will be
biased downward if
a) β is positive
b) β is negative
c) δ is positive
d) δ is negative

6. Omitting an explanatory variable from a regression in which you know it belongs

could be a legitimate decision if doing so
a) increases R-square
b) decreases the SSE
c) decreases MSE
d) decreases variance
 17

7. In general, omitting a relevant explanatory variable creates

a) bias and increases variance
b) bias and decreases variance
c) no bias and increases variance
d) no bias and decreases variance
8. Suppose you know for sure that a variable does not belong in a regression as an
explanatory variable. If someone includes this variable in their regression, in general
this will create
a) bias and increase variance
b) bias and decrease variance
c) no bias and increase variance
d) no bias and decrease variance

9. Adding an irrelevant explanatory variable which is orthogonal to the other explanatory

variables causes
a) bias and no change in variance
b) bias and an increase in variance
c) no bias and no change in variance
d) no bias and an increase in variance

10. A good thing about data mining is that it

a) avoids bias
b) decreases MSE
c) increases R-square
d) may uncover an empirical regularity which causes you to improve your
specification

11. A bad thing about data mining is that it is likely to

a) create bias
b) capitalize on chance
c) both of the above
d) none of the above

12. The bad effects of data mining can be minimized by

a) keeping variables in your specification that common sense tell you definitely belong
b) setting aside some data to be used to check the specification
c) performing a sensitivity analysis
d) all of the above

13. A sensitivity analysis is conducted by varying the specification to see what happens
to
a) Bias
b) MSE
c) R-square
 18

d) the coefficient estimates

16. The RESET test is

a) a z test b) a t test c) a chi-square test d) an F test

17. Regressing y on x using a distributed lag model specifies that y is determined by

a) the lagged value of y
b) the lagged value of x
c) several lagged values of x
d) several lagged values of x, with the coefficients on the lagged x’s decreasing as the
lag becomes longer

Week 10: Multicollinearity; Applied Econometrics

1. Multicollinearity occurs whenever

a) the dependent variable is highly correlated with the independent variables
b) the independent variables are highly orthogonal
c) there is a close linear relationship among the independent variables
d) there is a close nonlinear relationship among the independent variables

2. High collinearity is not a problem if

a) no bias is created
b) R-square is high
c) the variance of the error term is small
d) none of these

3. The multicollinearity problem is very similar to the problems caused by

a) nonlinearities
b) omitted explanatory variables
c) a small sample size
d) orthogonality

4. Multicollinearity causes
a) low R-squares
b) biased coefficient estimates
c) biased coefficient variance estimates
d) none of these

5. A symptom of multicollinearity is
a) estimates don’t change much when a regressor is omitted
b) t values on important variables are quite big
c) the variance-covariance matrix contains small numbers
 19

d) none of these

6. Suppose your specification is y = βx + γMale + θFemale + δWeekday + λWeekend +

ε
a) there is no problem with this specification because the intercept has been omitted
b) there is high collinearity but not perfect collinearity
c) there is perfect collinearity
d) there is orthogonality

7. A friend has told you that his multiple regression has a high R2 but all the estimates of
the regression slopes are insignificantly different from zero on the basis of t tests of
significance. This has probably happened because the a) intercept has been omitted
b) explanatory variables are highly collinear
c) explanatory variables are highly orthogonal
d) dependent variable doesn’t vary by much
9. Dropping a variable can be a solution to a multicollinearity problem because it a)
avoids bias
b) increases t values
c) eliminates the collinearity
d) could decrease mean square error

10. The main way of dealing with a multicollinearity problem is to

a) drop one of the offending regressors
b) increase the sample size
c) incorporate additional information
d) transform the regressors

11. A result of multicollinearity is that

a) coefficient estimates are biased
b) t statistics are too small
c) the variance of the error is overestimated
d) variances of coefficient estimates are large

12. A result of multicollinearity is that

a) OLS is no longer the BLUE
b) Variances of coefficient estimates are overestimated
c) R-square is misleadingly small
d) Estimates are sensitive to small changes in the data

15. Economic theory tells us that when estimating the real demand for exports we
should use the ______ exchange rate and when estimating the real demand for money
we should use the _______ interest rate. The blanks should be filled with a) real; real b)
real; nominal
c) nominal; real
 20

d) nominal; nominal

16. You have run a regression of the change in inflation on unemployment. Economic
theory tells us that our estimate of the natural rate of unemployment is
a) the intercept estimate
b) the slope estimate
c) minus the intercept estimate divided by the slope estimate
d) minus the slope estimate divided by the intercept estimate

19. Before estimating your chosen specification you should

a) data mine
b) check for multicollinearity
c) look at the data
d) test for zero coefficients
21. When the sample size is quite large, a researcher needs to pay special attention to
a) coefficient magnitudes
b) t statistic magnitudes
c) statistical significance
d) type I errors
22. Your only measure of a key economic variable is unsatisfactory but you use it
anyway. This is an example of
a) knowing the context
b) asking the right questions
c) compromising
d) a sensitivity analysis

23. “Asking the right question” means

a) selecting the appropriate null hypothesis
b) looking for a lost item where you lost it instead of where the light is better
c) resisting the temptation to change a problem so that it has a mathematically elegant
solution
d) all of the above

24. A sensitivity analysis involves

a) avoiding type I errors
b) checking for multicollinearity
c) omitting variables with low t values
d) examining the impact of specification changes

25. When testing if a coefficient is zero it is traditional to use a type I error rate of 5%.
When testing if a variable should remain in a specification we should
a) continue to use a type I error rate of 5%
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b) use a smaller type I error rate

c) use a larger type I error rate
d) forget about the type I error rate and instead choose a type II error rate

27. A type III error occurs when

a) you make a type I and a type II error simultaneously
b) type I and type II errors are confused
c) the right answer is provided to the wrong question
d) the wrong functional form has been used

28. The adage that begins with “Graphs force you to notice ….” is completed with
a) outliers
b) incorrrect functional forms
c) what you never expected to see
d) the real relationships among data
29. In econometrics, KISS stands for
a) keeping it safely sane b) keep it simple, stupid c) keep it sensibly simple
d) keep inference sophisticatedly simple

31. An example of the laugh test is that

a) your coefficient estimates are of unreasonable magnitude
b) your functional form is very unusual
c) your coefficient estimates are all negative
d) some of your t values are negative

32. Hunting statistical significance with a shotgun means

a) avoiding multicollinearity by transforming data
b) throwing every explanatory variable you can think of into your specification
c) using F tests rather than t tests
d) using several different type I error rates

33. “Capitalizing on chance” means that

a) by luck you have found the correct specification
b) you have found a specification that explains the peculiarities of your data set
c) you have found the best way of incorporating capital into the production function
d) you have done the opposite of data mining

34. The adage that begins with “All models are wrong, ….” is completed with
a) especially those with low R-squares
b) but some are useful
c) so it is impossible to find a correct specification
d) but that should not concern us
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35. Those claiming that statistical significance is being misused are referring to the
problem that
a) there may be a type I error
b) there may be a type II error
c) the coefficient magnitude may not be of consequence
d) there may be too much multicollinearity

37. To deal with results tainted by subjective specification decisions undertaken during
the heat of econometric battle it is suggested that researchers
a) eliminate multicollinearity
b) report a senstitivity analysis
c) use F tests instead of t tests
d) use larger type I error rates

39. Outliers should

a) be deleted from the data
b) be set equal to the sample average
c) prompt an investigation into their legitimacy
d) be neutralized somehow

40. Influential observations

a) can be responsible for a wrong sign
b) is another name for outliers
c) require use of an unusual specification
d) all of the above

Week 11: Autocorrelated errors; heteroskedasticity

1. If errors are nonspherical it means that they are

a) autocorrelated
b) heteroskedastic
c) autocorrelated or heteroskedastic
d) autocorrelated or heteroskedastic, or both

2. The most important consequence of nonspherical errors is that

a) coefficient estimates are biased
b) inference is biased
c) OLS is no longer BLUE
d) none of these

3. Upon discovering via a test that you have nonspherical errors you should
a) use generalized least squares
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b) find the appropriate transformation of the variables

c) double-check your specification
d) use an autocorrelation- or heteroskedasticity-consistent variance covariance matrix
estimate

4. GLS can be performed by running OLS on variables transformed so that the error term
in the transformed relationship is
a) homoskedastic
b) spherical
c) serially uncorrelated
d) eliminated

8. A “too-big” t statistic could come about because of

a) a very large sample size
b) multicollinearity
c) upward bias in our variance estimates
d) downward bias in our variance estimates

11. The Breusch-Godfrey test is

a) used to test the null of no autocorrelation
b) is valid even when the lagged value of the dependent variable appears as a regressor
c) is a chi-square test
d) all of the above

13. With heteroskedasticity we should use weighted least squares where

a) by doing so we maximize R-square
b) use bigger weights on those observations with error terms that have bigger variances
c) we use bigger weights on those observations with error terms that have smaller
variances
d) the weights are bigger whenever the coefficient estimates are more reliable

Week 12: Bayesian Statistics

1. The main difference between Bayesian and classical statisticians is

a) their choice of prior
b) their definitions of probability
c) their views of the type I error rate
d) the formulas for probability used in calculations

3. The sampling distribution of betahat

a) has mean 6
b) has mean beta
c) is graphed with beta on the horizontal axis
d) has the same interpretation as the posterior distribution
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4. The posterior distribution of beta

a) has mean 6
b) has mean beta
c) is graphed with betahat on the horizontal axis
d) has the same interpretation as the sampling distribution

13. Bayes theorem says that the posterior is

a) equal to the likelihood
b) proportional to the likelihood
c) equal to the prior times the likelihood
d) proportional to the prior times the likelihood

14. The subjective element in a Bayesian analysis comes about through use of
a) an ignorance prior
b) an informative prior
c) the likelihood
d) the posterior
15. The Bayesian loss function tells us
a) the loss incurred by using a particular point estimate
b) the expected loss incurred by using a particular point estimate
c) the loss associated with a posterior distribution
d) the expected loss associated with a posterior distribution
16. The usual “Bayesian point estimate” is the mean of the posterior distribution. This
assumes
a) a quadratic loss function
b) an absolute loss function
c) an all-or-nothing loss function
d) no particular loss function

17. The Bayesian point estimate is chosen by

a) minimizing the loss
b) minimizing expected loss
c) finding the mean of the posterior distribution
d) all of the above

18. From the Bayesian perspective a sensitivity analysis checks to see by how much the
results change when a different
a) loss function is used
b) prior is used
c) posterior is used
d) data set is used
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19. The main output from a Bayesian analysis is

a) the likelihood
b) the prior distribution
c) the posterior distribution
d) a point estimate

21. The Bayesian accepts/rejects a null hypothesis based on

a) minimizing the type I error
b) minimizing the type II error
c) maximizing the benefit from this decision
d) maximizing the expected benefit from this decision