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Specification Bias a . Define "specification bias". Describe why it is considered to be a "fatal" error when estimating an econometric model.

1. Specification Bias

a. Define "specification bias". Describe why it is considered to be a "fatal" error when estimating an econometric model.

b. Describe two ways the Granger Causality Test can help in the construction of a correctly specified econometric model.

c. When can a Durbin-Watson statistic indicate a "spurious" regression or possible specification error? What is a limitation of the DW statistic to detect such an error?

d. If you reject the Ho for the Omitted Variable Test, does that necessarily imply that you have a correctly specified model? Why or Why not?

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