Econometrics Exam #1

The error term has an expected value of 0 {Ans: On average, the residuals (errors) should sum to 0 for any given independent variable. This implies that the model does not systematically overestimate or underestimate the dependent variable. Violation Example: if intercept is omitted from the model, the error term may have a non-zero mean.}The error terms are normally distributed {Ans: For small sample sizes, it is assumed that error terms are normally distributed. This assumption ensures that hypothesis testing (like t and f tests) is valid, especially for small samples. This assumption is less critical with large sample sizes due to the central limit theory. Violation: If the error terms follow a skewed or heavy -ailed distrivbuton.}Error terms have constant variables {Ans: The variance of the error term should be constant across all levels of the independent variable. The assumption ensures that the spread of the residuals is the same for all values of x. when the error variance is not content, it leads to heteroskedasticity. Violation: If the spread of residuals increases with higher values of an independent variable, heteroskedasticity is present.}No autocorrelation, error terms are uncorrelated with one another {Ans: Error terms for