(a) What is a white noise process?

(b) Distinguish between exogenous and endogenous variables, using examples.

(c) What do you understand by simultaneity bias and can OLS can used in its presence?

(d) Consider the following simultaneous equations:

hours= β₁₀log (wage) + β₁₁+ β₁₂educ+ β₁₃age+ β₁₄kids+ β₁₅nwifeinc+u₁

log (wage)= α₁₀hours+ α₁₁+ α₁₂educ+ α₁₃exper+ α₁₄exper²+ u₂

The variable age is the woman's age, in years, kids is the number of children less than six years old, nwifeinc is the woman's nonwage income (which includes husband's earnings), and educ and exper are years of education and prior experience, respectively. All variables except hours and log(wage) are assumed to be exogenous.

i) Find out the identification status of the two equations

ii) Get the expressions for the reduced form equations for the two equations

e) Describe in details the procedure to estimate the above equations.

f) Prepare a recursive model (three-equations system) and state why OLS can be applied to each equations separately?

g) Describe, using examples what you understand by instrumental variables.