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    Question

    What is the term used when explanatory variable

    is correlated with the error term?
    A Autocorrelation Correct Answer Incorrect Answer
    B Multicollinearity Correct Answer Incorrect Answer
    C Heteroscedasticity Correct Answer Incorrect Answer
    D Endogeneity Correct Answer Incorrect Answer

    Solution

    Endogeneity occurs when a predictor variable (x) in a regression model is correlated with the error term (e) in the model. This can occur under a variety of conditions, but two cases are especially common in inequality research: (1) when important variables are omitted from the model (called “omitted variable bias”) and (2) when the outcome variable is a predictor of x and not simply a response to x (called “simultaneity bias”)

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