Is the following statement True, False or Uncertain. Specifically explain your a

Question

Is the following statement True, False or Uncertain. Specifically explain your answer.

1. In periods of monetary stability, interest rates tend to remain relatively constant, which makes econometric estimates of a money demand equation biased.

2.

Suppose the linear regression model is assumed to hold. If the data to be used in estimation are cross-sectional at a point in time and z does not vary over the cross-sectional observations, then z must be excluded from the model because of the perfect collinearity problem between 61 and B

Explanation / Answer

1)

Answer: False

Since, in the time of economic stability, the uncertainty of interest rate is lesser. So, it fluctuates lesser, thus the variance or disturbance of the interest is lower.

And in any regression, less volatility or variance will lead to a better result. So, it cannot make it much apart from the mean.

Therefore, this makes the equation of money demand not biased.

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