CEA Macroeconomic Indicators 5 — Questions and Answers
Question 1: What does a positively sloped yield curve typically signal about economic expectations?
- An imminent recession and falling growth
- Future economic expansion and rising short-term rates (Correct answer)
- Deflationary pressure and monetary easing
- Fiscal austerity and falling government borrowing
Correct answer: Future economic expansion and rising short-term rates
A normal upward-sloping yield curve reflects market expectations of economic growth and higher future interest rates.
Question 2: Which index measures price changes at the wholesale level before goods reach consumers?
- CPI
- PCE
- PPI (Correct answer)
- GDP deflator
Correct answer: PPI
The Producer Price Index (PPI) tracks the average change in prices received by domestic producers for their output and is a leading signal for consumer inflation.
Question 3: Country X has a trade deficit and a fiscal surplus. According to the twin deficits hypothesis, this combination is:
- Impossible under the national income identity
- Consistent if private saving exceeds private investment (Correct answer)
- A direct contradiction of the Mundell-Fleming model
- Only possible under a fixed exchange rate regime
Correct answer: Consistent if private saving exceeds private investment
CA = (S − I) + (T − G); if the government runs a surplus (T > G), private sector saving can still be less than investment, sustaining a trade deficit.
Question 4: Real GDP per capita is generally preferred over nominal GDP per capita as a living-standard measure because it:
- Accounts for income distribution across households
- Removes the effect of population change
- Controls for changes in the price level (Correct answer)
- Includes non-market household production
Correct answer: Controls for changes in the price level
Real GDP per capita adjusts for inflation so comparisons across time reflect actual changes in the quantity of goods and services, not just price increases.
Question 5: Which statement about the labor force participation rate is correct?
- It falls when discouraged workers stop searching and exit the labor force (Correct answer)
- It rises automatically when the unemployment rate rises
- It counts all adults aged 16 and over, including the institutionalized
- It is the ratio of employed persons to the total population
Correct answer: It falls when discouraged workers stop searching and exit the labor force
Discouraged workers who stop actively seeking work are no longer counted as unemployed OR in the labor force, reducing the participation rate.
Question 6: Which of the following would cause real GDP to overstate improvements in economic welfare?
- Inclusion of government spending on infrastructure
- Exclusion of leisure time and environmental quality (Correct answer)
- Use of chain-weighted price indexes
- Counting household final consumption expenditure
Correct answer: Exclusion of leisure time and environmental quality
GDP omits non-market goods like leisure, clean air, and household production, so rising GDP can coincide with declining overall welfare.
Question 7: When the Federal Reserve uses open market operations to purchase Treasury securities, the immediate effect is to:
- Decrease bank reserves and raise the federal funds rate
- Increase bank reserves and lower the federal funds rate (Correct answer)
- Increase the discount rate charged to commercial banks
- Raise required reserve ratios for depository institutions
Correct answer: Increase bank reserves and lower the federal funds rate
Purchasing securities injects reserves into the banking system, increasing the supply of funds and pushing the federal funds rate down.
CEA Macroeconomic Indicators 5
What does a positively sloped yield curve typically signal about economic expectations?