Real GDP is used to isolate changes in quantities produced from price changes, allowing comparisons over time without the effect of inflation. Nominal GDP, on the other hand, includes price variations, making it unsuitable for this comparison.

The PCE (Personal Consumption Expenditures) index is preferred by the Federal Reserve because it covers a wider range of expenditures and automatically adjusts weightings based on consumption behaviour, thus providing a more comprehensive measure of inflation.

In October 2022, inflation in the United States reached a record of 7.7%, which led the Federal Reserve to raise interest rates to combat this elevated inflation.

Two consecutive quarters of negative real GDP growth technically define a recession. However, this definition is retrospective, as it is identified after the data becomes available.

The ECB maintained high rates until June 2024 before making its first cut. This demonstrates that central banks act with a certain lag to ensure that the decline in inflation is sustainable.

This question tests the ability to classify indicators according to what they measure. Real GDP and the GDP deflator are linked to economic activity and inflation respectively, while the CPI and PCE specifically measure inflation.

Although inflation above 2% is generally a signal to raise rates in order to curb demand, this is not always automatic. Central banks may take other economic factors into account before deciding. For example, if inflation is temporary or caused by external shocks, they might choose not to raise rates.

The GDP deflator is calculated by dividing nominal GDP by real GDP and multiplying by 100. It provides a broad measure of inflation in the economy. A rise in the deflator indicates inflation, while a fall indicates deflation.