,
, MGT 6203 HOMEWORK 4 - PART 2
(INSTRUMENTAL VARIABLES) |
QUESTIONS AND ANSWERS | 2026
UPDATE | 100% CORRECT | WITH
COMPLETE SOLUTIONS.
SECTION 1: INSTRUMENTAL VARIABLES –
FOUNDATIONS (Questions 1-15)
Question 1
What is the primary purpose of using instrumental variables in
regression analysis?
A) To increase the R-squared of the model
B) To address endogeneity when a predictor is correlated with the error term
C) To reduce multicollinearity
D) To transform non-linear relationships
Correct Answer: B) To address endogeneity when a predictor is
correlated with the error term
Rationale: Instrumental variables are used to address endogeneity—
specifically, when a predictor variable is correlated with the error term,
which violates the OLS assumption of exogeneity . This correlation leads to
inconsistent and biased estimates. IV methods use an instrument Z that is
correlated with the endogenous X but uncorrelated with the error term,
isolating the exogenous variation in X.
, MGT 6203 HOMEWORK 4 - PART 2
(INSTRUMENTAL VARIABLES) |
QUESTIONS AND ANSWERS | 2026
UPDATE | 100% CORRECT | WITH
COMPLETE SOLUTIONS.
SECTION 1: INSTRUMENTAL VARIABLES –
FOUNDATIONS (Questions 1-15)
Question 1
What is the primary purpose of using instrumental variables in
regression analysis?
A) To increase the R-squared of the model
B) To address endogeneity when a predictor is correlated with the error term
C) To reduce multicollinearity
D) To transform non-linear relationships
Correct Answer: B) To address endogeneity when a predictor is
correlated with the error term
Rationale: Instrumental variables are used to address endogeneity—
specifically, when a predictor variable is correlated with the error term,
which violates the OLS assumption of exogeneity . This correlation leads to
inconsistent and biased estimates. IV methods use an instrument Z that is
correlated with the endogenous X but uncorrelated with the error term,
isolating the exogenous variation in X.
