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(a) (i) Why is the presence of endogeneity such an important issue in economic analysis? (10 Marks) (ii) What is an instrumental variable (IV)?

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(a) (i) Why is the presence of endogeneity such an important issue in economic analysis? (10 Marks) (ii) What is an instrumental variable (IV)? Give an example of an instrumental variable that could be used to solve a simultaneity problem between two variables and explain why it is valid. (5 Marks) (iii) What is meant by the rank condition in IV estimation? What other crucial conditions exist for successful IV estimation? (5 Marks)

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