Consider the following simple regression model y = ₀ + ₁x₁ + u. The variable z is a poor instrument for x if _____. A)there is a high correlation between z and x B)there is a low correlation between z and x C) there is a high correlation between z and u D) there is a low correlation between z and u

Question

Quizplus · Accepted Answer

A poor instrument for x is a variable that has a weak correlation with x but is strongly correlated with the error term u. Option B states that there is a low correlation between z and x, making it a poor instrument. Options A and C refer to high correlation, which would make z a potentially good instrument. Option D refers to the correlation between z and u, which is not relevant to determining if z is a good or poor instrument for x. The variable z is a poor instrument for x if there is a low correlation between z and x.

Consider the Following Simple Regression Model Y = 0

Consider the Following Simple Regression Model Y = ₀