The two conditions for a valid instrument are
A) corr(Zi, Xi) = 0 and corr(Zi, ui) ≠ 0.
B) corr(Zi, Xi) = 0 and corr(Zi, ui) = 0.
C) corr(Zi, Xi) ≠ 0 and corr(Zi, ui) = 0.
D) corr(Zi, Xi) ≠ 0 and corr(Zi, ui) ≠ 0.
Ans: C) corr(Zi, Xi) ≠ 0 and corr(Zi, ui) = 0.
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