CEA Macroeconomic Indicators 4 — Questions and Answers
Question 1: Which component is NOT included in the expenditure approach to measuring GDP?
- Gross private domestic investment
- Government transfer payments (Correct answer)
- Net exports
- Personal consumption expenditures
Correct answer: Government transfer payments
Transfer payments (e.g., Social Security) are not payments for current production and are excluded from GDP expenditure calculations.
Question 2: A country's terms of trade improve when:
- Import prices rise faster than export prices
- Export prices rise faster than import prices (Correct answer)
- The current account deficit widens
- The real exchange rate depreciates
Correct answer: Export prices rise faster than import prices
Terms of trade = export price index / import price index; an increase means each unit of exports buys more imports.
Question 3: In measuring inflation, hedonic quality adjustments are intended to correct for:
- Seasonal price fluctuations
- Substitution between product categories
- Quality improvements embedded in price changes (Correct answer)
- Changes in consumer preferences
Correct answer: Quality improvements embedded in price changes
Hedonic adjustment isolates the pure price change from any change in product quality so that better products don't artificially inflate the CPI.
Question 4: Which measure of money supply includes savings deposits, small time deposits, and retail money market funds?
- M0
- M1
- M2 (Correct answer)
- M3
Correct answer: M2
M2 adds less liquid assets—savings accounts, small CDs, and retail money market funds—to the narrower M1 definition.
Question 5: Seasonal adjustment of economic data is performed primarily to:
- Remove inflationary distortions from nominal figures
- Isolate the underlying trend by removing predictable calendar patterns (Correct answer)
- Convert data from quarterly to annual frequency
- Adjust for population growth over time
Correct answer: Isolate the underlying trend by removing predictable calendar patterns
Seasonal adjustment strips out recurring calendar-driven fluctuations so analysts can identify genuine cyclical or trend changes.
Question 6: Which scenario most accurately reflects a 'jobless recovery'?
- GDP grows while unemployment falls rapidly
- GDP shrinks while employment holds steady
- GDP grows but unemployment remains elevated or falls slowly (Correct answer)
- GDP and employment both decline simultaneously
Correct answer: GDP grows but unemployment remains elevated or falls slowly
A jobless recovery occurs when output rebounds but firms achieve higher productivity through existing workers rather than new hires, leaving unemployment high.
Question 7: The balance of payments must always sum to zero because:
- Central banks are prohibited from holding foreign reserves
- Every transaction is recorded as both a debit and a credit under double-entry bookkeeping (Correct answer)
- Current account surpluses always equal fiscal surpluses
- Exchange rates automatically adjust to equilibrate trade flows
Correct answer: Every transaction is recorded as both a debit and a credit under double-entry bookkeeping
Double-entry accounting ensures that for every payment outflow there is a corresponding inflow, making the overall balance of payments identically zero.
CEA Macroeconomic Indicators 4
Which component is NOT included in the expenditure approach to measuring GDP?