1. Economic models
Suppose an economist believes that the price level in the economy is directly related to the money
supply, or the amount of money circulating in the economy. The economist proposes the following
rel
...
1. Economic models
Suppose an economist believes that the price level in the economy is directly related to the money
supply, or the amount of money circulating in the economy. The economist proposes the following
relationship:
P=A×MP=A×M
• P=Price LevelP=Price Level
• M=Money SupplyM=Money Supply
• A=A composite of other factors, including real GDP, that change very slowly o
ver time.A=A composite of other factors, including real GDP, that change very slowly over time.
How might an economist gather empirical data to test the proposed relationship between money and
the price level?
An economist would persuade the Federal Reserve to change the money supply to various levels,
and observe the resulting changes in the price level.
Economists do not usually develop theoretical models of the economy but only analyze summary
statistics about the current state of the economy.
Unlike researchers in the hard sciences, economists cannot study complex relationships using
data.
An economist would look for data on past changes in the money supply, and note the resulting
changes in the price level
Points:
1 / 1
Close Explanation
Explanation:
Much like researchers in other sciences, such as physics and biology, economists develop theories and
models to describe the world based on observed phenomena. Methods of testing such theories,
however, differ greatly based on the applicability and feasibility of controlled lab experiments.
Unlike physicists and biologists, economists typically cannot run controlled laboratory experiments to
generate data to test their models and theories. This is especially true of models describing the macro
economy, such as those relating to the price level, the inflation rate, and the unemployment rate. If an
economist wanted to test the above model relating the price level to the money supply, it is unlikely
the Federal Reserve would allow the economist to vary the money supply (and potentially drastically
affect the economy) simply to test an economic theory. Rather, an economist would likely have to look
at available data on previous changes in the money supply and how the price level changed in
response.
1. Economic models
The following diagram presents a circular-flow model of a simple economy. The outer set of arrows
(shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the
corresponding flow of inputs and outputs.
Which of the following is true regarding this economic model?
Because it does not take into account international trade, the circular-flow diagram is useless for
the purposes of modeling how dollars and resources move throughout an economy.
Because it does not take into account the role of government, the circular-flow diagram is useless
for the purposes of modeling how dollars and resources move throughout an economy.
Because, in reality, the economy is very large, the simplicity of the circular-flow diagram makes it
useless for the purposes of modeling how dollars and resources move throughout an economy.
While simple, the circular-flow diagram can still be useful for the purposes of modeling how dollars
and resources move throughout an economy.
Points:
1 / 1
Close Explanation
Explanation:
Scientists of all types make assumptions in their models to simplify the complex world they are trying
to describe. These simplifying assumptions allow scientists to focus on only the most important and
generalizable components of the topic of study.
Economists also make simplifying assumptions to focus on only the most important and generalizable
aspects of the economy. Indeed, economies typically consist of millions of individuals interacting in
many different ways. However, no model can include every detail of a system as complex as an
economy. To make sense of all of the different aspects of an economy, economists must make
simplifying assumptions and generalizations in order to focus on only the most important economic
ideas. By grouping all individuals into households and firms and all markets into markets for goods and
services and markets for factors of production, economists can model how dollars and resources flow
back and forth among agents in the economy. The simplicity of the model allows those without formal
backgrounds in economics to understand, at a high level, the economic activities that take place in an
economy.
1. Economic models
Consider the following production possibilities frontier model for an economy that produces only two
goods: corn and cars.
020406080100100806040200CARS (Millions)CORN (Millions of bushels)PPF
Which of the following is true regarding this economic model?
The fact that there are only two goods produced in this theoretical economy is a simplifying
assumption that still allows economists to demonstrate key economic concepts.
This PPF is not an economic model.
The fact that there are only two goods produced in this theoretical economy, when, in reality,
economies produce many more types of goods, means this model is generally useless.
In order to construct such a model, an economist would need real life data regarding countries
that only produce two goods.
Points:
1 / 1
Close Explanation
Explanation:
Scientists, of all types, make assumptions in their models to simplify the complex world they are trying
to describe. Making these simplifying assumptions allows scientists to focus on only the most
important and most generalizable components of the topic of study.
Economists are no different. Economists make simplifying assumptions in all economic models in order
to focus on the most important economic variables in a given situation. In this case, while much of the
practical application of the production possibilities frontier (PPF) model is lost when only two goods are
allowed, many key insights can more ea
[Show More]
.png)
.png)
