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      Question

      In a regression, if an important explanatory variable is

      omitted, it can lead to:
      A Heteroscedasticity. Correct Answer Incorrect Answer
      B Autocorrelation. Correct Answer Incorrect Answer
      C Omitted variable bias (a violation of the zero conditional mean assumption). Correct Answer Incorrect Answer
      D Perfect multicollinearity. Correct Answer Incorrect Answer
      E None of these Correct Answer Incorrect Answer

      Solution

      Omitted variable bias occurs when a variable that is correlated with both the included regressor(s) and the dependent variable is left out of the model. This causes the error term to be correlated with the regressor, biasing the OLS estimates.

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