Correct Answer: A

Measuring independent variables with an error creates time-series model misspecification. An example is using forward rates instead of spot rates.

Other common problems that create this type of time-series misspecification are:

• Using lagged dependent variables as independent variables in regressions with serially correlated errors.
• Using a function of the dependent variable as an independent variable, for example, forecasting the past.

B and C are incorrect. They violate the assumption that a model has the correct functional form when, in fact, it does not, thus creating functional form model misspecification.