CBE Business Cycles and Economic Indicators 2 — Questions and Answers
Question 1: Which composite index published by The Conference Board is most widely used to forecast future economic activity over the next 3–6 months?
- Consumer Confidence Index
- Leading Economic Index (LEI) (Correct answer)
- Producer Price Index (PPI)
- Purchasing Managers' Index (PMI)
Correct answer: Leading Economic Index (LEI)
The Conference Board's Leading Economic Index (LEI) aggregates ten forward-looking indicators specifically designed to predict near-term economic direction.
Question 2: A Purchasing Managers' Index (PMI) reading above 50 indicates:
- Economic contraction in the manufacturing sector
- Expansion in the manufacturing sector (Correct answer)
- Stable, unchanged economic conditions
- A decrease in new business investment
Correct answer: Expansion in the manufacturing sector
A PMI above 50 signals that more purchasing managers reported improving than deteriorating conditions, indicating sector expansion.
Question 3: Which of the following is classified as a lagging economic indicator?
- Stock market returns
- Building permits issued
- Average prime lending rate charged by banks (Correct answer)
- Manufacturers' new orders for capital goods
Correct answer: Average prime lending rate charged by banks
The average prime lending rate is a lagging indicator because banks typically adjust rates after economic conditions have already changed.
Question 4: The Consumer Price Index (CPI) is best described as a measure of:
- Changes in prices of goods produced domestically at the factory gate
- Changes in prices paid by urban consumers for a representative basket of goods and services (Correct answer)
- Changes in wholesale prices before retail markup is applied
- The purchasing power of the U.S. dollar relative to a basket of foreign currencies
Correct answer: Changes in prices paid by urban consumers for a representative basket of goods and services
The CPI tracks price changes experienced by urban consumers for a fixed basket of goods and services, serving as the primary measure of consumer-level inflation.
Question 5: The yield curve is described as 'inverted' when:
- Short-term interest rates exceed long-term interest rates (Correct answer)
- Long-term interest rates exceed short-term interest rates by a wide margin
- All maturities have identical interest rates
- The Federal Reserve raises the federal funds target rate
Correct answer: Short-term interest rates exceed long-term interest rates
An inverted yield curve occurs when short-term yields are higher than long-term yields, which has historically been a reliable recession predictor.
Question 6: Which statement best describes 'coincident indicators' in economic analysis?
- Indicators that change before the economy changes direction
- Indicators that change after the economy has already shifted direction
- Indicators that move in tandem with the overall economy in real time (Correct answer)
- Indicators that measure expectations and forward-looking inflation
Correct answer: Indicators that move in tandem with the overall economy in real time
Coincident indicators, such as employment levels and industrial production, move simultaneously with the broader economy and confirm current economic conditions.
Question 7: Real GDP differs from nominal GDP primarily because real GDP:
- Excludes government spending and transfer payments
- Is adjusted for changes in the price level (inflation or deflation) (Correct answer)
- Measures only final goods and services produced for export
- Includes only goods and services produced within national borders
Correct answer: Is adjusted for changes in the price level (inflation or deflation)
Real GDP removes the effect of price level changes by using constant base-year prices, allowing meaningful comparison of output across different time periods.
CBE Business Cycles and Economic Indicators 2
Which composite index published by The Conference Board is most widely used to forecast future economic activity over the next 3–6 months?