Discussion
The direct application of OLS method for Simultaneous Equations leads to :
Answer: D
Direct OLS leads to biased and inconsistent estimation.
In a simultaneous equations model, an endogenous variable that appears as an explanatory variable is correlated with the error term of its equation, because it is jointly determined with the dependent variable. This violates a key OLS assumption, and the result is simultaneity bias: the estimates are biased, and the bias does not disappear even in large samples, so they are also inconsistent.
That is why methods such as indirect least squares and two-stage least squares are used for such models.
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