ECO 391 exam #2 – uky questions with
correct answers
what does the standard error of the estimate measure? - correct answer ✔✔the variability of
the observed y-values around the predicted y-values
what does the R^2 of a multiple regression of y on x1 and x2 measure? - correct answer ✔✔the
percent variability of y that is explained by the variability in x1 and x2
What is violation #1 of OLS? - correct answer ✔✔model suffers from multicollinearity
What is an example of multicollinearity? - correct answer ✔✔sales & sales tax from companies
in the same city
What is violation #2 of OLS? - correct answer ✔✔heteroskedasticity
What is heteroskedasticity? - correct answer ✔✔the circumstance in which the variability of a
variable is unequal across the range of values of a second variable that predicts it
What is an example of heteroskedasticity? - correct answer ✔✔predicting sales by square
footage of convenience stores
What is violation #3 of OLS? - correct answer ✔✔serial correlation or autocorrelation
What is an example of serial or autocorrelation? - correct answer ✔✔quarterly sales @ a
restaurant exhibiting seasonality
What is violation #4 of OLS? - correct answer ✔✔Endogeneity
, What is endogeneity? - correct answer ✔✔when an explanatory variable is correlated w/ the
error term, it is called endogeous and the model is said to suffer from endogeneity
What is an example of endogeneity? - correct answer ✔✔omitted variable, reverse causality
What are the 7 assumptions of OLS? - correct answer ✔✔1) that the model y=b0+b1x1+...+bkxk
is linear in the b parameters with additive error e
2) conditional on x1, x2...xk the error term has an expected value of zero
3) there's no exact linear relationship among the x values; there's no perfect multicollinearity
4) variance for error term e is the same for all x values (this is called homoskedasticity)
5) error term e is uncorrelated across observations, conditional on explanatory variables (no
serial or autocorrelation)
6) error term e is normally distributed
7) error term e is uncorrelated w/ explanatory variables
What is correlation coefficient? - correct answer ✔✔the linear dependence between 2 sets of
data
What is the range of the correlation coefficient? - correct answer ✔✔-1 to 1
As the absolute value of the correlation coefficient approaches 1, what happens to the linear
relationship? - correct answer ✔✔it strengthens
when is multicollinearity suspected? - correct answer ✔✔when there is a high R^2 coupled with
insignificant explanatory variables
correct answers
what does the standard error of the estimate measure? - correct answer ✔✔the variability of
the observed y-values around the predicted y-values
what does the R^2 of a multiple regression of y on x1 and x2 measure? - correct answer ✔✔the
percent variability of y that is explained by the variability in x1 and x2
What is violation #1 of OLS? - correct answer ✔✔model suffers from multicollinearity
What is an example of multicollinearity? - correct answer ✔✔sales & sales tax from companies
in the same city
What is violation #2 of OLS? - correct answer ✔✔heteroskedasticity
What is heteroskedasticity? - correct answer ✔✔the circumstance in which the variability of a
variable is unequal across the range of values of a second variable that predicts it
What is an example of heteroskedasticity? - correct answer ✔✔predicting sales by square
footage of convenience stores
What is violation #3 of OLS? - correct answer ✔✔serial correlation or autocorrelation
What is an example of serial or autocorrelation? - correct answer ✔✔quarterly sales @ a
restaurant exhibiting seasonality
What is violation #4 of OLS? - correct answer ✔✔Endogeneity
, What is endogeneity? - correct answer ✔✔when an explanatory variable is correlated w/ the
error term, it is called endogeous and the model is said to suffer from endogeneity
What is an example of endogeneity? - correct answer ✔✔omitted variable, reverse causality
What are the 7 assumptions of OLS? - correct answer ✔✔1) that the model y=b0+b1x1+...+bkxk
is linear in the b parameters with additive error e
2) conditional on x1, x2...xk the error term has an expected value of zero
3) there's no exact linear relationship among the x values; there's no perfect multicollinearity
4) variance for error term e is the same for all x values (this is called homoskedasticity)
5) error term e is uncorrelated across observations, conditional on explanatory variables (no
serial or autocorrelation)
6) error term e is normally distributed
7) error term e is uncorrelated w/ explanatory variables
What is correlation coefficient? - correct answer ✔✔the linear dependence between 2 sets of
data
What is the range of the correlation coefficient? - correct answer ✔✔-1 to 1
As the absolute value of the correlation coefficient approaches 1, what happens to the linear
relationship? - correct answer ✔✔it strengthens
when is multicollinearity suspected? - correct answer ✔✔when there is a high R^2 coupled with
insignificant explanatory variables
