Question: 3. (a) Consider the population model Y = X + u where Y and u are n 1 vectors, X is an n k matrix

3. (a)

Consider the population model

Y = X + u where Y and u are n 1 vectors, X is an n k matrix containing observations of

k variables and is a k 1 vector of unknown parameters. Discuss whether it is accurate to say that if we estimate by Ordinary Least Squares

we will identify values which we know to be close to the true values

In your answer you should be sure to make clear any assumptions you make and explain as fully as possible any statements you make.

(b) What changes about your answer to (a) if you are told that there is a variable which should have been included in the population model which has been omitted from X?

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