CEA Policy Evaluation & Economic Forecasting 4

Question 1

When evaluating a minimum wage increase, a 'bunching estimator' identifies the effect by examining:

Accepted Answer

Excess mass in the wage distribution at the new minimum

Answer

Bunching estimators exploit the spike in the wage distribution exactly at the minimum wage to infer the employment and wage effects of the policy.

Question 2

The Taylor Rule provides a framework for setting:

Accepted Answer

The federal funds rate based on inflation and output gap deviations

Answer

The Taylor Rule prescribes an interest rate that responds to deviations of inflation from target and output from potential, guiding central bank decisions.

Question 3

An economic analyst uses a DSGE model. What distinguishes it from a purely statistical model?

Accepted Answer

It is grounded in microeconomic theory about agent optimization and market clearing

Answer

DSGE models derive dynamics from explicit optimization by households, firms, and policymakers, making them theoretically consistent and useful for structural policy analysis.

Question 4

The 'Lucas critique' warns policy evaluators that:

Accepted Answer

Estimated behavioral relationships break down when policy changes, because agents adjust expectations

Answer

Lucas argued that using historical reduced-form relationships to simulate policy is flawed because private sector expectations—and thus behavior—change in response to policy shifts.

Question 5

A sunflower (spaghetti) chart displaying multiple GDP forecast paths from different models is most useful for:

Accepted Answer

Communicating forecast uncertainty and the range of plausible outcomes

Answer

Fan or spaghetti charts show the distribution of forecast paths, making the range of uncertainty visible to policymakers and the public.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Policy Evaluation & Economic Forecasting 4