Mixed Deck — All CEA Topics Flashcards

An optimal currency area (OCA) theory, developed by Robert Mundell, suggests that a common currency is beneficial when member regions have:

Answer: High factor mobility and synchronized business cycles

OCA theory holds that a currency union works best when regions face symmetric shocks and factors can move freely to facilitate adjustment without exchange rate tools.

Which of the following best describes the concept of 'opportunity cost'?

Answer: The value of the next best alternative foregone when making a choice

Opportunity cost represents what is sacrificed — the value of the best alternative not chosen — rather than just money paid.

A tariff-rate quota (TRQ) allows imports:

Answer: At a low tariff up to a threshold, then a higher tariff above it

A TRQ charges a lower (or zero) tariff on imports up to a specified quantity and a higher tariff on any imports exceeding that threshold.

When a firm's marginal revenue equals zero, which of the following is true about demand elasticity?

Answer: Demand is unit elastic

When MR = 0, total revenue is maximized, which occurs at the unit-elastic point on a linear demand curve.

Which of the following best describes heteroskedasticity in a regression model?

Answer: The variance of the error term changes with the level of an independent variable

Heteroskedasticity means the spread (variance) of residuals is not constant and often increases or decreases with the magnitude of an explanatory variable.

An economic analyst is tasked with forecasting a turning point in the business cycle, specifically the beginning of a recovery after a recession. Which of the following economic indicators would be most useful for this purpose?

Answer: New orders for consumer goods and materials

Leading indicators are economic variables that tend to change before the overall economy changes, making them useful for predicting turning points. New orders for consumer goods and materials are a classic leading indicator because companies increase orders in anticipation of future economic activity and consumer demand. The Industrial Production Index is a coincident indicator (moves with the economy), while the average duration of unemployment and changes in CPI are generally considered lagging indicators (change after the economy has already turned).

Efficiency wage theory suggests that firms pay workers above the market-clearing wage primarily because:

Answer: Higher wages reduce shirking, lower turnover, and increase worker productivity

Efficiency wage theory holds that above-equilibrium wages motivate workers to avoid dismissal, reduce costly turnover, and attract higher-quality applicants.

If two non-stationary I(1) series are cointegrated, which modeling approach is most appropriate?

Answer: Apply a Vector Error Correction Model (VECM)

Cointegrated series share a long-run equilibrium, so a VECM captures both the short-run dynamics and the long-run error correction mechanism.

A leftward shift in the labor supply curve in a competitive market most likely indicates:

Answer: A decrease in workforce participation due to factors such as an aging population or higher non-labor income

A leftward labor supply shift means fewer workers are willing to work at any given wage, driven by demographic aging, early retirement, rising transfer income, or rising non-market opportunity costs.

An industry with high fixed costs relative to variable costs tends to exhibit:

Answer: Intense price competition during downturns

High fixed cost industries experience intense price competition during downturns as firms price down to marginal cost to cover variable costs and contribute to fixed overhead.

The 'invisible hand' metaphor introduced by Adam Smith describes:

Answer: How self-interested behavior leads to socially beneficial outcomes in free markets

Smith argued that individuals pursuing self-interest in competitive markets unintentionally promote the public good.

The income effect of a price decrease suggests that consumers will:

Answer: Feel relatively richer and increase consumption of normal goods

A price decrease increases real purchasing power, allowing consumers to buy more of normal goods via the income effect.

A national government wants to evaluate the impact of a new nationwide carbon tax policy on industrial emissions. The policy was implemented for the entire country at the same time, making a traditional control group unavailable. However, detailed emissions data is available for many years prior to the policy's implementation. Which evaluation method is most appropriate for this scenario?

Answer: Interrupted Time Series (ITS)

Interrupted Time Series (ITS) analysis is the most suitable method here. ITS is a quasi-experimental design that specializes in evaluating the impact of a population-level intervention implemented at a specific point in time. It uses the long-term data from before the intervention to establish a trend, which is then compared to the trend after the intervention to estimate the policy's effect. RCT and DiD are not feasible as they require a control group, and RDD requires a specific cutoff point for eligibility, which is not present here.

The concept of 'price discrimination' requires which key condition?

Answer: The ability to prevent resale between market segments

Price discrimination only works if the seller can segment markets and prevent arbitrage (resale between segments).

A regression discontinuity design (RDD) estimates causal effects by exploiting:

Answer: A discontinuous jump in treatment probability at a known cutoff value

RDD compares outcomes just above and just below a cutoff where treatment assignment changes sharply, using the discontinuity as a source of quasi-random variation.

Regulatory impact analysis (RIA) is designed primarily to:

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.

The Augmented Dickey-Fuller (ADF) test adds lagged difference terms to the basic Dickey-Fuller test primarily to:

Answer: Account for serial correlation in the residuals

Augmenting with lagged differences corrects for autocorrelation in the error term, ensuring the test statistic has the correct distribution.

In a difference-in-differences (DiD) analysis, the parallel trends assumption requires that:

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.

In the context of economic forecasting, what does 'nowcasting' refer to?

Answer: Estimating the current state of the economy using real-time data

Nowcasting uses high-frequency real-time data (e.g., weekly jobless claims) to estimate economic conditions for the current or very recent period.

A Type II error in hypothesis testing occurs when:

Answer: A false null hypothesis is not rejected

A Type II error (false negative) occurs when we fail to reject a null hypothesis that is actually false.