How do economists try to disentangle cause and effect?
What will be an ideal response?
Economists use models to understand some aspect of the economic world. Testing the predictions of models makes it necessary to disentangle cause and effect. To overcome this problem, economists have three methods of testing their models: Using a natural experiment, using a statistical investigation, and using economic experiments. A natural experiment is a situation that arises in the ordinary course of life in which one factor being studied varies and the other factors are the same. This method allows the economist to focus on the effect from the factor that differs between the two situations. A statistical investigation looks for correlations between variables but then determining whether the correlation actually reflects causation can be difficult. An economic experiment puts people into decision making situations and then varies the relevant factors one at a time to determine each factor's effect.
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Increased investment spending in the economy would be a possible result of
A) an increase in interest rates. B) a decrease in the money supply. C) an open market sale of bonds by the Fed. D) an open market purchase of bonds by the Fed.
Employment in the tertiary sector in the 20th century showed
(a) a marked cyclical tendency in harmony with the business cycle. (b) a leveling off in times of recession. (c) a downturn during cyclical expansions. (d) a steady increase since 1900.
Economics is a social science that involves the study of how individuals
A) develop their tastes and preferences. B) maximize their wealth. C) define happiness. D) choose among alternatives to satisfy their unlimited wants.
Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a coat and $50 for pants. Consumers of type B will pay $75 for a coat and $75 for pants. The firm selling suits faces no competition and has a marginal cost of zero. If the firm charges $100 for a suit (which includes both pants and a coat), the firm will sell a suit to:
A. type A consumers. B. type A consumers and type B consumers. C. type B consumers. D. None of the answers are correct.