CBA Forecasting & Revenue Estimation 2 — Questions and Answers
Question 1: In revenue forecasting, the 'cone of uncertainty' widens as the forecast horizon extends because:
- Data sources become less reliable over time
- Cumulative forecast errors grow with each additional period (Correct answer)
- Seasonal adjustments compound annually
- Regression coefficients become negative
Correct answer: Cumulative forecast errors grow with each additional period
Each period's forecast error compounds on previous errors, so uncertainty intervals widen progressively as predictions extend further into the future.
Question 2: A budget analyst calculates a MAPE of 8% for a revenue forecast. This indicates that on average, the forecast was off by:
- 8 cents per dollar of actual revenue
- 8 percentage points above actual revenue
- 8% of the actual revenue value (Correct answer)
- 8 basis points from the benchmark
Correct answer: 8% of the actual revenue value
MAPE expresses average forecast error as a percentage of actual values, so 8% means the forecast differed from actuals by 8% of each actual revenue figure on average.
Question 3: Which scenario planning approach assigns probability weights to alternative economic scenarios before blending them into a single revenue estimate?
- Deterministic forecasting
- Probabilistic scenario weighting (Correct answer)
- Zero-based forecasting
- Naive forecasting
Correct answer: Probabilistic scenario weighting
Probabilistic scenario weighting assigns likelihood percentages to optimistic, baseline, and pessimistic scenarios, then computes a weighted-average revenue estimate.
Question 4: The leading economic indicator most commonly used to forecast individual income tax revenues is:
- Consumer Price Index (CPI)
- Personal income and wages (Correct answer)
- Federal funds rate
- Producer Price Index (PPI)
Correct answer: Personal income and wages
Personal income and wages directly determine the taxable income base from which individual income tax revenues are derived.
Question 5: When a revenue forecast consistently overestimates actual collections over multiple periods, the analyst should first investigate:
- Whether the forecasting model has systematic positive bias (Correct answer)
- Whether actuals were recorded correctly
- Whether the Delphi panel size was adequate
- Whether seasonality was double-counted
Correct answer: Whether the forecasting model has systematic positive bias
Persistent over-forecasting suggests systematic positive bias in the model's assumptions or structure, which must be identified and corrected to improve accuracy.
Question 6: The Office of Management and Budget (OMB) requires agencies to use which economic assumptions as the baseline for multi-year budget submissions?
- Congressional Budget Office assumptions only
- OMB's own economic forecast (Correct answer)
- Agency-developed projections
- Federal Reserve's economic projections
Correct answer: OMB's own economic forecast
OMB directs agencies to use OMB's official economic assumptions—GDP growth, inflation, interest rates—as the baseline for preparing multi-year budget submissions.
Question 7: Which statistical concept measures the proportion of variance in revenue that is explained by the independent variables in a regression-based forecast model?
- Mean Absolute Error
- Autocorrelation coefficient
- Coefficient of determination (R²) (Correct answer)
- Variance inflation factor
Correct answer: Coefficient of determination (R²)
R² (coefficient of determination) measures what fraction of the total variance in the dependent variable is explained by the regression model's independent variables.
CBA Forecasting & Revenue Estimation 2
In revenue forecasting, the 'cone of uncertainty' widens as the forecast horizon extends because: