4. An economist believes that housing construction depends (positively) on house

Question

4. An economist believes that housing construction depends (positively) on household wealth, (positively) on the quality of school district, and (negatively) on interest rates. Having read only the chapter on simple regression, he regresses housing construction on wealth, ignoring the quality of school district and interest rates, and obtain a negative estimate of Beta, indicating that an increase in household wealth decreases housing construction. How might his omission of school district and interest rates explain this incorrect sign? Please be specific and use the classical assumptions to formulate your answers.

Explanation / Answer

Yes omitting this school district and interest rates can definetly explain this negative sign.

As it gives the exact relationship between all the three variables.

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