The Classical model makes two roughly equivalent assumptions to ensure the indep
ID: 3205608 • Letter: T
Question
The Classical model makes two roughly equivalent assumptions to ensure the independence of the explanatory variables from the equation's randomly distributed residuals: either the explanatory variables are assumed fixed in repeated resampling, or the explanatory variables change in each sample but do so randomly. Why are these assumptions equivalent, i.e. why would either one of these assumptions ensure the independence of the explanatory variables from the (randomly distributed) residuals? Explain.Explanation / Answer
The two assumptions are equavalant, since we are treated the explanatory variable as non stochostic. That is, non random variable. This may seem arbitrary to you, except in a case where the explanatory variable really is fixed by experiemtnal control. Therefore,
1. No measurement error
2. No serieal correlation where a lagged value of Y would be used as an independent variable.
3. No simultanity or endogeneous explanatory variables