Question: a) What do you understand by the term multicollinearity, discuss the consequences of multicollinearity in ordinary least square estimation (10 marks) b) Consider the

a) What do you understand by the term multicollinearity, discuss the consequences

a) What do you understand by the term multicollinearity, discuss the consequences of multicollinearity in ordinary least square estimation (10 marks) b) Consider the model Y, B + BX2 + BX + &, where Y, is consumption expenditure in real dollars, X2, is GDP and X3, is total population. However GDP and population are likely to be correlated. Provide transformed models in (i) Ratio and (ii) First difference forms that will reduce the multicollinearity problem. (5 marks)

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a Multicollinearity occurs when two or more independent variables in a regression model are highly correlated with each other This high correlation ca... View full answer

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