Economic models usually present only 1 type of interest rate but there are more than 20 in
reality. Is this an oversimplification that may lead to wrong analysis of monetary policy?
Solution
Macroeconomic models are widely used because they allow the analyst to simplify a
situation. A real economy is a virtual porridge of interaction and data. To make some sense of
this recondite chaos, the analyst will pull out those key variables which seem to have the most
importance and fit only them into a logical scheme, omitting the others. Likewise, composites of
individual human economic behavior are aggregated in macroeconomic models, and as such are
simplified. A rational consumption function with all of its arguments (e.g. consumption depends
upon income, wealth, expected income and wealth, the rate of inflation, etc.), for example,
makes
the useful simplifying assumption that individual consumers are fairly consistent and similar in
their economic behavior, allowing for a generalization of the aggregate behavior.
Such simplifications are not only expedient but necessary. Nonetheless, the model in its
simplicity is different than the real economy (or segment of the real economy) that it is designed
to replicate. The omitted variables often do matter in the real economy. Likewise some
generalizations end up being too crude to produce precise or accurate results.
So,this an oversimplification doesn\'t lead to wrong analysis of monetary policy..
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Solution
Answers
13) b) A person moving from full time job to part time job
14) a) Structural Unemployment
15) b) cyclical unemployment
16) c) Connect lenders and borrowers
17) b) Human Capital
18) d) A stable legal and political environment
