Economics Models and Theories Quiz

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Questions and Answers

Which of the following statements are examples of normative statements? (Select all that apply)

  • We should increase spending on education (correct)
  • There is a significant relationship between a country's spending on human capital and its economic growth
  • If a country spends more on human capital, it causes faster economic growth
  • Economic theory clearly tells us that we should increase spending on education (correct)

Economic models are simplified versions of reality that are designed to:

  • Eliminate all uncertainty and complexity from economic analysis
  • Provide a comprehensive and detailed representation of the real world
  • Focus on specific economic relationships while omitting irrelevant details (correct)
  • Prove definitively the causal relationships between economic variables

According to Karl Popper's philosophy of science, testable predictions are central because they allow for:

  • The potential falsification of a theory through empirical evidence (correct)
  • The elimination of all possible alternative explanations for observed phenomena
  • The development of theories that are universally true and accepted
  • The confirmation of a theory's validity through repeated experimental verification

Which of the following is NOT a characteristic of economic models?

<p>They are always expressed in mathematical terms (A)</p> Signup and view all the answers

What is the significance of the quote "All models are wrong, but some are useful" by George Box?

<p>It acknowledges that models are simplifications, but they can still provide valuable insights (C)</p> Signup and view all the answers

What concept is linked with the idea that supply creates its own demand?

<p>Say's Law (B)</p> Signup and view all the answers

Which theory incorporates the concept of sticky prices and monopolistic competition?

<p>New Keynesian Model (A)</p> Signup and view all the answers

Who is credited with the critique that influenced the Lucas Critique?

<p>Robert Lucas (B)</p> Signup and view all the answers

Which issue is characterized by the rise of financial frictions, especially highlighted by Bernanke?

<p>Great Moderation (C)</p> Signup and view all the answers

What does the quote by Olivier Blanchard suggest about Classical Economics?

<p>It is an intellectual mix with confusion and insights. (B)</p> Signup and view all the answers

What does the Neoclassical Synthesis primarily expand upon?

<p>Keynesian economic principles (B)</p> Signup and view all the answers

What characterizes the monetary viewpoint in the Monetarist Counter Revolution?

<p>The belief that inflation stems from adjusted inflation expectations (B)</p> Signup and view all the answers

According to the New Classical Economics, what is a main critique regarding policy predictions?

<p>They must account for changes in individuals' behavior in response to policy (D)</p> Signup and view all the answers

What was a significant implication of the US Phillips Curve during 1960-1969?

<p>It pointed to a trade-off between inflation and unemployment in the short run (C)</p> Signup and view all the answers

What does stagflation refer to in economic terms?

<p>A recession characterized by supply-side factors alongside inflation (D)</p> Signup and view all the answers

What economic theory did John Maynard Keynes primarily respond to during the Great Depression?

<p>Classical Economics (A)</p> Signup and view all the answers

Which of the following models is associated with the Neoclassical Synthesis?

<p>IS-LM model (A)</p> Signup and view all the answers

What concept did the Phillips Curve, discovered by A.W. Phillips in 1958, illustrate?

<p>The relationship between inflation and unemployment (A)</p> Signup and view all the answers

Who is known for the restatement of the Quantity Theory?

<p>Milton Friedman (C)</p> Signup and view all the answers

Which theory emphasizes countercyclical fiscal policy as a tool for managing economic fluctuations?

<p>New Keynesian Economics (A)</p> Signup and view all the answers

What principle does the concept of 'Liquidity Preference for Money' highlight?

<p>The demand for holding money over investment (B)</p> Signup and view all the answers

Which concept did Robert Lucas contribute to with his theory of Rational Expectations?

<p>Forecasting economic variables (C)</p> Signup and view all the answers

What economic model was formulated by Samuelson in 1947?

<p>Foundations of Economic Analysis (D)</p> Signup and view all the answers

What is the primary focus of microeconomics?

<p>Analyzing the choices of individual consumers and firms. (B)</p> Signup and view all the answers

Which of the following is NOT an example of an economic aggregate studied in macroeconomics?

<p>The price of a specific brand of coffee. (A)</p> Signup and view all the answers

What is the main difference between positive and normative analysis?

<p>Positive analysis focuses on what is, while normative analysis focuses on what should be. (B)</p> Signup and view all the answers

Which of the following questions is best addressed by microeconomics?

<p>What factors determine the price of gasoline? (A)</p> Signup and view all the answers

The statement "The government should increase the minimum wage to help low-income workers" is an example of:

<p>Normative analysis. (A)</p> Signup and view all the answers

Flashcards

Positive Statements

Statements that can be validated as true or false but aren't necessarily so.

Normative Statements

Opinion-based statements that cannot be proved or disproved.

Economic Models

Simplified representations of reality used to analyze real-world situations.

Falsification

The process of testing theories by trying to prove them wrong.

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Scientific Method

A systematic way to test predictions and build scientific consensus.

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Coordination Failure

A situation where individuals cannot coordinate actions, hindering economic performance.

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Lucas Critique

A theory arguing that empirical analyses of policy cannot ignore rational expectations.

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General Equilibrium

A state where supply and demand balance in goods, financial, and labor markets.

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The New Keynesian Model

A synthesis of RBC theory with sticky prices and monopolistic competition.

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Short-run Output Determination

In the short run, output is influenced by aggregate demand levels.

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Great Moderation

A period of reduced economic volatility from the mid-1980s until 2008.

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Neoclassical Synthesis

A refinement and expansion of Keynesian economics, popular from 1940-1960.

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Behavioural Macroeconomics

An approach challenging traditional theories by incorporating psychological factors.

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Monetarist Counter Revolution

An economic theory emphasizing the role of money supply in the economy.

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Classical Economics

An economic theory focusing on free markets and self-regulation.

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Keynesian Revolution

A macroeconomic theory developed by John Maynard Keynes during the Great Depression.

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Effective Demand

Total spending in the economy, determining output and employment levels.

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Countercyclical Fiscal Policy

Government strategy of increasing spending during recession and decreasing in boom.

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Phillips Curve

An economic concept showing the inverse relationship between inflation and unemployment.

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New Keynesian Economics

An evolution of Keynesian theory incorporating modern price and wage rigidity.

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Rational Expectations

A theory suggesting people use all available information to forecast the future.

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Macroeconomics

The study of economic aggregates like growth, inflation, and unemployment.

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Microeconomics

The study of individual decision-makers and their resource allocation.

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Economic Allocation

The distribution of scarce resources in an economy.

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Positive Analysis

Describes the economy objectively and factually.

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Normative Analysis

Describes the economy based on values and opinions.

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Study Notes

Introduction to Economics

  • Economics is the study of allocating scarce resources.
  • Allocation answers the question: What is produced, how, and for whom in an economy?
  • Allocation involves efficiency in three aspects:
    • What goods and services are demanded (Preferences)
    • How firms produce goods and services (Production Process)
    • Who receives those goods and services (Re-distribution)

Microeconomics and Macroeconomics

  • Microeconomics: Studies individual decision-makers (consumers, workers, firms) and their interaction in markets.
  • Macroeconomics: Studies economic aggregates like economic growth, inflation, unemployment, and entire economic systems.
  • Note: Macroeconomics builds upon microeconomics. Microeconomics data informs Macroeconomics.

Positive vs. Normative Analysis

  • Positive analysis: Describes the world objectively and factually. Statements can be validated as correct or incorrect.
  • Normative analysis: Describes how the world should be. Statements are opinion-based and cannot be proven.
  • Example: "Increased education spending will improve test scores" is positive. "We should increase education spending" is normative.

Economic Models

  • Simplified versions of reality used to analyze real-world situations.
  • Models:
    • Leave out irrelevant details
    • Are goal-oriented
    • Explicitly name assumptions
    • Often use mathematical terms for precision and transparency.
  • Models are like maps of reality. "All models are wrong, but some are useful." (George Box)
  • Note: Social science models can change the predicted outcome during the prediction process.

The Scientific Method

  • A process for developing and testing theories in economics.
  • Starts with a theory
  • Derives testable predictions
  • Repeated testing, revision or falsification
  • Validated theories become part of the scientific consensus.

History of Macroeconomics

  • Classical Economics: Focused on inflation, interest rates, business cycles, and quantity theory. (Pre-1940)
  • Keynesian Revolution: Emphasized aggregate demand, effective demand, consumption, and liquidity preference, to respond to the Great Depression. (1936)
  • Neoclassical Synthesis: Combined classical and Keynesian ideas with refinement and mathematical formulation of economic theory. (1940-1960)
  • Monetarism: Focused on the money supply as a key factor in inflation. (1960s)
  • New Classical Economics: Argued for rational expectations and policy ineffectiveness. (1970s-2000s)
  • New Keynesian Economics: Emphasized sticky prices and wages, and market imperfections. (1970s-2000s)
  • New Neoclassical Synthesis: Combined ideas to explain short-run and long-run effects. (2000s-now)

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