Which of the Following Assumptions Is Required to Obtain a First-Differenced

question 6

Multiple Choice

Which of the following assumptions is required to obtain a first-differenced estimator in a two-period panel data analysis?

• A)The explanatory variable does not change over time for any cross-sectional unit.
• B)The explanatory variable changes by the same amount in each time period.
• C)The variance of the error term in the regression model is not constant.
• D)The idiosyncratic error at each time period is uncorrelated with the explanatory variables in both time periods.

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Definitions:

Rate of Inflation

The percentage increase in the price level of goods and services in an economy over a period of time, typically calculated annually.

U.S. Exports

Goods and services produced in the United States and sold to other countries, contributing to the country's GDP.

Freely Flexible Exchange Rates

An exchange rate system in which the value of currencies are determined by the open market and subject to the forces of supply and demand without direct intervention by central banks.

American Trade Deficit

occurs when the total amount of goods and services the United States imports exceeds the amount it exports, leading to a net outflow of domestic currency to foreign markets.