b) Define BLUE and under what assumptions are OLS estimators BLUE?

c) You have the monthly data of the Dow Jones Industrial Average (DOW) and Consumer Confidence Index (CFI) from January 2003 to August 2019. Using OLS, you estimate a model where DOW is the dependent variable and CFI is the independent variable. Your friend informs you that your model is mis-specified because you do not capture the occurrence of the Global Financial Crisis in 2008 and the election of Donald Trump as US President in November 2016.

(i) Explain how you would modify your model to capture the impacts of the Global Financial Crisis and the change in government which happened on November 2016.

(ii) Explain how you could confirm that the change in US government in November 2016 may have an impact on the DOW.

(iii) Your friend then says that you should include the US unemployment rate as an additional control. However, you suspect that doing so would induce imperfect multicollinearity. How would you attempt to uncover this phenomenon and what are the issues that may arise when multicollinearity is ignored?

a) (i) Consider the following regression model: Yt=0+1Xt+2Xt2+t Your classmate claims that the equation above is a non-linear regression equation. Do you agree or disagree with her assertion? Explain. (ii) Provide an example where the model in (i) may be suitable. Also, illustrate with diagrams to support your answer where appropriate. a) (i) Consider the following regression model: Yt=0+1Xt+2Xt2+t Your classmate claims that the equation above is a non-linear regression equation. Do you agree or disagree with her assertion? Explain. (ii) Provide an example where the model in (i) may be suitable. Also, illustrate with diagrams to support your answer where appropriate