What is meant by the term "omitted variable" in correlation analysis? Explain with an example
What will be an ideal response?
An omitted variable is something that has been left out of a study which, if included, would explain why two variables are correlated. For example, it is seen that the rate of employees quitting is lower in firms that pay higher wages. Thus, a conclusion can be drawn that higher wages result in lower quit rates. But there are many other variables that might influence the quit rates apart from wages such as employee benefits provided by the firm, age of employees, work-life balance, etc. These variables that have been left out are omitted variables and if included in the study would better explain the quit rates of firms.
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Increases in the prices of services due to improvement in its quality indicate a(n) _____
a. decline in productivity. b. decline in real GDP. c. increase in output. d. decline in manufacturing output. e. increase in technological progress.
If a country was operating well below its long-run capacity (potential GDP), the initial impact of an unanticipated increase in the money supply would most likely result in an increase in
a. prices with little change in output. b. output with little change in prices. c. output and a decline in prices. d. prices and a decline in output.