CEA Policy Evaluation & Economic Forecasting 5 ā Questions and Answers
Question 1: A regression discontinuity design (RDD) is valid for policy evaluation only when:
- Sample sizes exceed 10,000 observations
- Assignment to treatment is determined by crossing a known threshold and agents cannot precisely manipulate the running variable (Correct answer)
- The policy is implemented nationally with no control group
- Pre-treatment trends differ between groups
Correct answer: Assignment to treatment is determined by crossing a known threshold and agents cannot precisely manipulate the running variable
RDD exploits a sharp eligibility cutoff to mimic randomization, but its validity requires that units near the threshold cannot precisely sort themselves above or below it.
Question 2: Nowcasting in economic analysis refers to:
- Long-run trend projection using Hodrick-Prescott filtering
- Real-time estimation of current economic conditions using high-frequency data before official statistics are released (Correct answer)
- Seasonal adjustment of monthly employment data
- Backcasting historical GDP using revised national accounts
Correct answer: Real-time estimation of current economic conditions using high-frequency data before official statistics are released
Nowcasting uses real-time, high-frequency indicators (credit card transactions, shipping data) to estimate current GDP before official releases.
Question 3: If a policy analyst finds a statistically significant but economically trivial effect (e.g., p < 0.001, effect size = 0.02%), the appropriate conclusion is:
- The policy is highly effective and should be expanded
- Statistical significance confirms the policy is cost-effective
- The effect is reliably detected but too small to justify substantial policy investment (Correct answer)
- The result is invalid due to measurement error
Correct answer: The effect is reliably detected but too small to justify substantial policy investment
Statistical significance indicates the effect is distinguishable from zero, but economic significanceāthe practical magnitudeāmust also be evaluated for policy relevance.
Question 4: The Beveridge Curve plots the relationship between:
- Inflation and unemployment (Phillips Curve variant)
- Job vacancy rate and unemployment rate (Correct answer)
- GDP growth and fiscal deficit
- Interest rates and investment spending
Correct answer: Job vacancy rate and unemployment rate
The Beveridge Curve shows the negative relationship between job openings and unemployment, and is used to assess labor market matching efficiency and policy effectiveness.
Question 5: In computable general equilibrium (CGE) modeling, a trade policy shock is simulated by:
- Running a simple regression of trade on tariff levels
- Changing tariff parameters and solving for the new market-clearing equilibrium across all sectors simultaneously (Correct answer)
- Estimating reduced-form effects from historical tariff changes only
- Applying IO multipliers to the directly affected sector
Correct answer: Changing tariff parameters and solving for the new market-clearing equilibrium across all sectors simultaneously
CGE models capture economy-wide interactions by simultaneously solving for equilibrium in all markets after the policy shock alters relative prices.
Question 6: A government program shows positive outcomes in a randomized pilot but fails to replicate at national scale. This 'scaling failure' is most likely due to:
- Data fabrication in the pilot study
- General equilibrium effects, site-selection bias, or implementation challenges absent in the pilot (Correct answer)
- The use of difference-in-differences in the pilot evaluation
- Lack of statistical power in the national rollout
Correct answer: General equilibrium effects, site-selection bias, or implementation challenges absent in the pilot
Pilots often operate in favorable conditions with hand-picked sites and staff; at scale, GE price effects, heterogeneous populations, and weaker implementation reduce impact.
Question 7: Which forecasting approach explicitly models uncertainty by simulating thousands of possible future paths based on random shocks?
- Delphi method
- Monte Carlo simulation (Correct answer)
- Naive random walk model
- Exponential smoothing
Correct answer: Monte Carlo simulation
Monte Carlo simulation generates a distribution of outcomes by repeatedly drawing random shocks and propagating them through a model, quantifying the full range of uncertainty.
CEA Policy Evaluation & Economic Forecasting 5
A regression discontinuity design (RDD) is valid for policy evaluation only when: