The optimal amount of R&D spending for the firm occurs where its expected return is equal to the interest-rate cost-of-funds to finance it.

Inflation redistributes income to a greater extent when the inflation is unanticipated compared to when the inflation is anticipated

Indicate whether the statement is true or false

Which of the following is a drawback of including proxy variables in a regression model?

A. It leads to misspecification analysis. B. It reduces the error variance. C. It increases the error variance. D. It exacerbates multicollinearity.