Increasing the Number of Overidentifying Restrictions Can Cause Severe Biases

question 26

True/False

Increasing the number of overidentifying restrictions can cause severe biases in two stage least squares estimators.

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Definitions:

Wealth Effect

A behavioral economic theory suggesting that consumers spend more as the value of their assets rises, particularly visible in the increase in spending following a rise in home values or stock market portfolios.

Interest-Rate Effect

A theory suggesting that a change in interest rates will affect the level of spending on consumer goods and services due to the changes in borrowing costs.

Aggregate-Demand Curve

A curve that shows the total quantity of goods and services that all households, companies, government, and foreign buyers will purchase at each price level.

Exchange-Rate Effect

The impact of a change in the domestic currency's value on the country's international trade balance, influenced by the relative prices of domestic and foreign goods.