CEA Policy Evaluation & Economic Forecasting 2 — Questions and Answers
Question 1: A government implements a carbon tax. Which evaluation framework best captures both market efficiency gains and distributional equity concerns?
- Cost-benefit analysis alone
- Cost-effectiveness analysis alone
- Multi-criteria analysis incorporating efficiency and equity metrics (Correct answer)
- Input-output analysis
Correct answer: Multi-criteria analysis incorporating efficiency and equity metrics
Multi-criteria analysis explicitly weighs both efficiency and distributional outcomes, making it superior for policies with trade-offs between these goals.
Question 2: When a forecaster says the 90% confidence interval for GDP growth is [-0.5%, 3.5%], this primarily communicates:
- The exact probability that growth will be 1.5%
- The range within which growth will definitely fall
- The uncertainty surrounding the point estimate (Correct answer)
- The historical average growth rate
Correct answer: The uncertainty surrounding the point estimate
Confidence intervals express the uncertainty around a forecast, not certainty; a 90% CI means 90% of such intervals would contain the true value in repeated sampling.
Question 3: The 'counterfactual' in policy evaluation refers to:
- The actual outcome after policy implementation
- What would have happened in the absence of the policy (Correct answer)
- The cost of implementing an alternative policy
- The statistical model used to forecast outcomes
Correct answer: What would have happened in the absence of the policy
The counterfactual is the hypothetical baseline—what outcomes would have been without the intervention—used to isolate policy effects.
Question 4: In a difference-in-differences (DiD) analysis, the parallel trends assumption requires that:
- Treatment and control groups have equal baseline outcomes
- Both groups would have followed the same trend absent treatment (Correct answer)
- The treatment effect is constant across all time periods
- Sample sizes in both groups are identical
Correct answer: Both groups would have followed the same trend absent treatment
Parallel trends assumes control and treatment groups would have evolved similarly over time without the intervention, validating the counterfactual.
Question 5: Which leading economic indicator is most useful for forecasting consumer spending 6 months ahead?
- Current unemployment rate
- Consumer confidence index (Correct answer)
- Prior quarter GDP revision
- Current trade balance
Correct answer: Consumer confidence index
The consumer confidence index leads consumer spending because it captures households' forward-looking sentiment about income and job security.
Question 6: Regulatory impact analysis (RIA) is designed primarily to:
- Enforce compliance with existing regulations
- Estimate fiscal revenue from new taxes
- Assess anticipated costs and benefits before a rule is finalized (Correct answer)
- Monitor post-implementation outcomes only
Correct answer: Assess anticipated costs and benefits before a rule is finalized
RIA is an ex-ante tool that quantifies expected costs and benefits to inform regulatory decisions before rules take effect.
Question 7: A structural break in a time-series model used for inflation forecasting most likely signals:
- Seasonal adjustment errors
- A permanent change in the underlying economic relationship (Correct answer)
- Temporary measurement noise
- Serial correlation in residuals
Correct answer: A permanent change in the underlying economic relationship
Structural breaks indicate that the parameters governing a relationship have shifted permanently, requiring model re-estimation or regime switching.
CEA Policy Evaluation & Economic Forecasting 2
A government implements a carbon tax.
Which evaluation framework best captures both market efficiency gains and distributional equity concerns?