Consider the Following Simple Regression Model Y = ₀

question 9

Multiple Choice

Consider the following simple regression model y = ₀ + ₁x₁ + u. The variable z is a poor instrument for x if _____.

• A)there is a high correlation between z and x
• B)there is a low correlation between z and x
• C)there is a high correlation between z and u
• D)there is a low correlation between z and u

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Definitions:

Interest Rate Differential

The difference in interest rates between two distinct economic or financial instruments.

Exchange Rate

The price of one currency in terms of another, crucial in international finance as it determines how much one currency is worth in another.

Political Risk

The risk of losing money due to changes in a country's political environment or policy.