Economic Models, Assumptions and Analysis
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Questions and Answers

An economic model is BEST described as:

  • A complex representation of all aspects of a real-world economy, used for precise forecasting.
  • A complete duplication of a real economy, used for experimental purposes.
  • A simplified version of reality used to analyze real-world economic problems. (correct)
  • A purely theoretical construct with no connection to actual economic phenomena.

When economists collect and analyze data to test their theories, they are engaging in:

  • Positive economics. (correct)
  • Prescriptive economics.
  • Normative economics.
  • Descriptive economics.

Which of the following activities is NOT a typical task for an economist?

  • Developing theories to explain economic phenomena.
  • Implementing fiscal policies. (correct)
  • Analyzing data to verify or refute economic theories.
  • Collecting data to test economic theories.

What is the primary goal of economists when they devise theories and collect data?

<p>To verify or refute their theories through empirical analysis. (C)</p> Signup and view all the answers

The study of economics primarily involves:

<p>Analyzing the behavior of economic units and the impact of public policies. (B)</p> Signup and view all the answers

Which of the following statements is a positive economic statement?

<p>A decrease in interest rates will lead to increased investment. (B)</p> Signup and view all the answers

Which activity is NOT typically performed by economists at Finance Canada?

<p>Enforcing competition laws. (D)</p> Signup and view all the answers

An economist claims that 'raising the minimum wage will decrease employment.' What type of statement is this, and what is required to validate it?

<p>Positive; it requires empirical evidence. (A)</p> Signup and view all the answers

Why might a government not follow the advice of economists?

<p>Political considerations may outweigh economic recommendations. (C)</p> Signup and view all the answers

If an economist at Global Affairs Canada predicts that a new trade agreement will increase Canada's exports by 10%, what kind of statement is this, and what does it imply?

<p>Positive; it is a testable hypothesis about the impact of the agreement. (C)</p> Signup and view all the answers

Why are assumptions important in economic analysis?

<p>They allow for simplification and generalization of economic problems. (A)</p> Signup and view all the answers

What is the primary purpose of a circular-flow diagram?

<p>To show the flow of goods, services, and money between households and firms. (B)</p> Signup and view all the answers

What does the Production Possibilities Frontier (PPF) represent?

<p>The potential combinations of outputs an economy can produce with available resources and technology. (B)</p> Signup and view all the answers

What does a point inside the Production Possibilities Frontier (PPF) indicate?

<p>An inefficient use of resources, with potential for increased production. (B)</p> Signup and view all the answers

How would technological advancements in computer manufacturing affect the Production Possibilities Frontier (PPF)?

<p>The PPF would shift outwards, particularly along the computers axis, indicating increased production capacity. (D)</p> Signup and view all the answers

In the context of the circular-flow diagram, if households increase their savings, what is the immediate impact on the flow of money?

<p>It decreases the flow of money to the product market. (D)</p> Signup and view all the answers

According to the Production Possibilities Frontier (PPF), what does the outward-bound shape indicate?

<p>Increasing opportunity costs as resources are reallocated. (A)</p> Signup and view all the answers

What is the effect of assuming a closed economy in an economic analysis?

<p>It simplifies the analysis by excluding international interactions. (B)</p> Signup and view all the answers

If a production possibilities frontier (PPF) illustrates the trade-off between computers and wheat, and point F (100 computers, 3000 tons of wheat) requires 40,000 hours of labor in an economy with a labor capacity that allows for greater production, what does point F represent?

<p>An inefficient point, as more of either good could be produced without sacrificing the other. (A)</p> Signup and view all the answers

Considering an economy that can produce both computers and wheat, if point G (300 computers, 3500 tons of wheat) requires 65,000 hours of labor, but the economy only has 50,000 hours available, what does point G represent?

<p>An infeasible point, as it requires more resources than are available. (B)</p> Signup and view all the answers

How does a shift in the production possibilities frontier (PPF) typically occur?

<p>As a result of technological advancements or an increase in available resources, allowing for greater production of both goods. (A)</p> Signup and view all the answers

Which scenario would most likely lead to an inward shift of a country's production possibilities frontier (PPF)?

<p>A devastating natural disaster that destroys a significant portion of the country's resources. (C)</p> Signup and view all the answers

An economist is analyzing the effect of a new tax on consumer behavior. Which type of statement would best describe their analysis?

<p>A positive statement, as it seeks to describe and explain the world without making value judgments. (D)</p> Signup and view all the answers

Which of the following statements is an example of a normative economic statement?

<p>The government should increase the minimum wage to reduce income inequality. (C)</p> Signup and view all the answers

Which of the following scenarios best illustrates the role of an economist acting as a policy advisor?

<p>An economist testifies before Congress, recommending a specific course of action to address unemployment. (A)</p> Signup and view all the answers

Identify the statement below that is considered a positive economic statement.

<p>Increased investment in education will lead to higher economic growth. (B)</p> Signup and view all the answers

Flashcards

Economics

The study of how economic units behave, interact, and the impact of public policies.

What Economists Do

Economists create theories, gather data, and analyze it to confirm or disprove their theories.

Economic Model

A simplified representation of a real-world economic situation.

Positive Statement

Describes a relationship that can be tested with data.

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Normative Statement

A statement of opinion or value judgment that cannot be tested.

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Economists at Finance Canada

Designing tax policies.

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Economists at Environment and Climate Change Canada

Designing environmental regulations.

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Economists at Employment and Social Development Canada

Analyzing data on workers.

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Inefficient Point (PPF)

A point on the PPF indicating resources are not fully utilized or efficiently allocated.

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Infeasible Point (PPF)

A point outside the PPF, representing a level of production that is unattainable with the current resources and technology.

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Example of a positive statement

Prices rise when the government increases the quantity of money.

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Example of a normative statement

The government should print less money.

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Example of a normative statement

A tax cut is needed to stimulate the economy.

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Example of a positive statement

An increase in the price of burritos will cause an increase in consumer demand for video rentals.

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Role of Assumptions

Essential for creating a setting for economic studies. They allow simplification of complex scenarios, enabling analysis.

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Circular-Flow Diagram

A basic economic model showing the movement of money, goods, and services between firms and households through markets.

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Production Possibilities Frontier (PPF)

A graph illustrating the maximum possible combinations of goods an economy can produce with its available resources and technology.

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Shape of PPF

The PPF typically has a bowed-out (concave) shape, reflecting increasing opportunity costs as production shifts between goods.

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Point Inside the PPF

A point inside the PPF indicates that the economy is not using its resources efficiently.

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Point Outside the PPF

A point outside the PPF is unattainable given the current resources and technology.

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PPF as a Model

The PPF is a graphical model that depicts all possible combinations of two goods that can be produced efficiently.

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Opportunity Cost

The amount of one good that must be sacrificed to produce one more unit of another good.

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Study Notes

The Economist as Scientist

  • Economics studies economic units' behaviors, interactions, and the effects and forces of public policies, including fiscal and monetary policy.
  • Economists devise theories, collect data, and then analyze the data, attempting to verify or refute their theories.

Economic Models

  • An economic model is a simplified description of a real economic problem.
  • Economic models provide an analytical framework and are mathematical.

The Role of Assumptions

  • Assumptions are crucial for establishing an environment for economic analysis.
  • Assumptions simplify complex real-world scenarios, making analysis possible or easier.
  • Different assumptions lead to different specific answers but simpler versions can generalize answers.
  • Examples include assuming a closed economy with one firm producing two goods, equal educational attainment/skill level among workers, and constant prices/wage rates.

Circular-Flow Diagram

  • The circular-flow diagram visually represents how goods, services, and money flow through markets between households and firms in the economy.
  • A simplified version involves two decision-makers and two markets.

Production Possibilities Frontier (PPF)

  • The Production Possibilities Frontier (PPF) is a graph showing the combinations of output an economy can produce given available factors of production and technology.
  • The PPF typically has a specific bowed-outward shape.

Applying the PPF

  • Point F (100 computers, 3000 tons of wheat) requires 40,000 hours of labor which is possible, but not efficient.
  • Point G (300 computers, 3500 tons of wheat) requires 65,000 hours of labor, which is not possible given an economy with only 50,000 hours.

Economist as Policy Adviser

  • Economists, when trying to explain the world, act as scientists; when trying to improve it, they are policy advisers.
  • Positive statements describe the world as it is.
  • Normative statements prescribe how the world should be.

Positive vs. Normative Statements

Prices rise when the government increases the quantity of money, is a positive statement.

  • The government should print less money, is a normative statement.
  • A tax cut is needed to stimulate the economy, is a normative statement.
  • An increase in the price of burritos will cause an increase in consumer demand for video rentals, is a positive statement.

Economists in Ottawa

  • Economists at Finance Canada help design tax policies.
  • Economists at the Competition Bureau help design and enforce Canada's competition laws.
  • Economists at Global Affairs Canada help negotiate trade agreements with other countries.
  • Economists at Employment and Social Development Canada analyze data on workers and техт those looking for work to help formulate labor market policies.
  • Economists at Environment and Climate Change Canada help design environmental regulations.
  • Statistics Canada employs economists to collect data and give policy advice.

Economists Advice and Government

  • Any economist advising government must know recommendations are not always heeded.
  • Figuring out the right policy is only part of the government's job.

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Related Documents

Chapter 2: Thinking Like an Economist - Production Possibilities Frontier

Description

Economics studies economic units' behaviors and policies. Economists use theories and data to verify them, employing simplified economic models with assumptions to analyze complex scenarios. The circular-flow diagram visually represents economic transactions.

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