T Or F? 1.The true regression relationship is Y = 1 + 2X2 + 3X3 + u , and the co

Question

T Or F?

1.The true regression relationship is Y = 1 + 2X2 + 3X3 + u , and the coefficients are thought to have the following signs: 2 > 0 and  3 < 0. If the investigator omits X3 and instead estimates Y = 1 + 2X2 + v, then the coefficient on X2 will overestimate the effect of X2 on Y if the omitted variable X3 is negatively correlated with both X2 and Y.

2.

A regression of employment growth rate (e) on real GDP growth rate (g) and real GDP growth rate squared (gsq) yielded the following results:

              e = -1.68   + 1.2g – 0.053gsq

                     (0.656) (0.386)   (0.044)         n=31

The quadratic specification is statistically significant and should be kept in the model (the level of significance criteria is =5%).

Explanation / Answer

Solution to 1) the staement is true since, the coefficient of 3 < 0 therefore, in its absence the coefficient on X2 will overestimate the effect of X2 on Y to compensate for the lost variation

2) The statement is false as on addition of the quadratic term the intercept becomes negative making the model unstable.

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