When you add state fixed effects to a simple regression model for U.S. states over a certain time period, and the regression R² increases significantly, then it is safe to assume that A)the included explanatory variables, other than the state fixed effects, are unimportant. B)state fixed effects account for a large amount of the variation in the data. C)the coefficients on the other included explanatory variables will not change. D)time fixed effects are unimportant.

Question

Quizplus · Accepted Answer

When adding state fixed effects results in a significant increase in the regression R², it is an indication that a large amount of variability in the data is explained by state fixed effects. This means that state-specific differences are significant contributors to the model, and other explanatory variables may not be as important. Time fixed effects are not mentioned in the question and cannot be assumed to be unimportant based on the given information.

When You Add State Fixed Effects to a Simple Regression