CEA Macroeconomic Indicators 3 — Questions and Answers
Question 1: Which of the following best describes the output gap?
- The difference between exports and imports
- The gap between actual GDP and potential GDP (Correct answer)
- The spread between short-term and long-term interest rates
- The difference between nominal and real wages
Correct answer: The gap between actual GDP and potential GDP
The output gap measures how far actual economic output deviates from the economy's non-inflationary potential.
Question 2: Okun's Law describes an empirical relationship between:
- Inflation and money supply growth
- Interest rates and investment spending
- Unemployment rate changes and GDP growth (Correct answer)
- Trade deficits and exchange rates
Correct answer: Unemployment rate changes and GDP growth
Okun's Law estimates that for every 1 percentage point rise in unemployment above its natural rate, GDP falls roughly 2% below potential.
Question 3: What does a rising velocity of money (V) imply, holding the money supply constant?
- Nominal GDP must fall
- Nominal GDP must rise (Correct answer)
- Real GDP must fall
- The price level must fall
Correct answer: Nominal GDP must rise
From the quantity theory (MV = PQ), if M is constant and V rises, then the product PQ (nominal GDP) must increase.
Question 4: Which of the following is a LAGGING economic indicator?
- S&P 500 index
- Average weekly initial jobless claims
- Commercial and industrial loans outstanding (Correct answer)
- Manufacturers' new orders for consumer goods
Correct answer: Commercial and industrial loans outstanding
Commercial and industrial loans outstanding typically peak after the economy has already begun to recover, making it a lagging indicator.
Question 5: A country runs a current account deficit. According to the national income identity, this implies:
- Investment exceeds national saving (Correct answer)
- National saving exceeds investment
- Government spending exceeds tax revenue
- Exports exceed imports
Correct answer: Investment exceeds national saving
CA = S − I; a current account deficit means domestic investment exceeds national saving, requiring foreign capital inflows to finance the gap.
Question 6: The natural rate of unemployment is best described as the rate that exists when:
- The economy is in a recession
- Cyclical unemployment is zero (Correct answer)
- Structural unemployment is zero
- Frictional unemployment is zero
Correct answer: Cyclical unemployment is zero
The natural rate equals frictional plus structural unemployment; cyclical unemployment is zero when the economy operates at potential.
Question 7: Which pricing index is used to deflate personal consumption expenditures and is the Federal Reserve's preferred inflation gauge?
- CPI-U
- CPI-W
- PCE Price Index (Correct answer)
- PPI Final Demand
Correct answer: PCE Price Index
The Personal Consumption Expenditures (PCE) Price Index is the Fed's preferred measure because it uses chain-weighting and covers a broader spending basket.
CEA Macroeconomic Indicators 3
Which of the following best describes the output gap?