Macroeconomics Chapter 1 Test Questions

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Economics
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A social science that examines how people choose among the alternatives available to them. It is social because it involves people and their behavior. It is a science because it uses, as much as possible, a scientific approach in its investigation of choices.
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Scarcity
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The condition of having to choose among alternatives
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Scarce good
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A good for which the choice of one alternative requires that another be given up
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Free good
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A good for which the choice of one does not require that another be given up
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Opportunity cost
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The value of the best alternative forgone in making any choice.
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What are the three fundamental economic questions?
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1. What should be produced? 2. How should goods and services be produced? 3. For whom should goods and services be produced?
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Economics is a social science that examines how people choose among the alternatives available to them.
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Scarcity implies that we must give up one alternative in selecting another. A good that is not scarce is a free good.
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Every choice has an opportunity cost and opportunity costs affect the choices people make. The opportunity cost of any choice is the value of the best alternative that had to be forgone in making that choice.
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What are the three features that distinguish the economic approach to choice from the approaches taken in other social sciences?
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1. Economists give special emphasis to the role of opportunity costs in their analysis of choices. 2. Economists assume that individuals make choices that seek to maximize the value of some objective, and that they define their objectives in terms of their own self-interest. Individuals maximize by deciding whether to do a little more or a little less of something. 3. Economists argue that individuals pay attention to the consequences of small changes in the levels of the activities they pursue.
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Margin
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The margin is the current level of an activity. Think of it as the edge from which a choice is to be made.
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Choice at the margin
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A choice at the margin is a decision to do a little more or a little less of something.
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Microeconomics
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Microeconomics is the branch of economics that focuses on the choices made by individual decision-making units in the economy—typically consumers and firms—and the impacts those choices have on individual markets.
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Macroeconomics
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Macroeconomics is the branch of economics that focuses on the impact of choices on the total, or aggregate, level of economic activity.
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Both microeconomics and macroeconomics give attention to individual markets. But in microeconomics that attention is an end in itself; in macroeconomics it is aimed at explaining the movement of major economic aggregates—the level of total output, the level of employment, and the price level.
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Variable
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A variable is something whose value can change.
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Constant
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A constant is something whose value does not change.
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Scientific method
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A systematic set of procedures through which knowledge is created
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Hypothesis
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A hypothesis is an assertion of a relationship between two or more variables that could be proven to be false. A statement is not a hypothesis if no conceivable test could show it to be false.
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Theory
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A hypothesis that has not been rejected after widespread testing and that wins general acceptance is commonly called a theory.
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Law
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A theory that has been subjected to even more testing and that has won virtually universal acceptance becomes a law.
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Model
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A model is a set of simplifying assumptions about some aspect of the real world.
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Ceteris paribus
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a Latin phrase that means “all other things unchanged.”
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Hypotheses in economics typically specify a relationship in which a change in one variable causes another to change. We call the variable that responds to the change the _______________. The variable that induces a change is called the __________________.
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a. Dependent Variable b. Independent variable
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The fallacy of false cause
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Reaching the incorrect conclusion that one event causes another because the two events tend to occur together is called the fallacy of false cause.
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A statement of fact or a hypothesis is a __________________________.
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positive statement Although people often disagree about positive statements, such disagreements can ultimately be resolved through investigation.
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A ___________________ is one that makes a value judgment.
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normative statement An assertion that cannot be proved correct or incorrect. Assertions for which investigation can never resolve differences.
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Scientists cannot prove a hypothesis to be true; they can only fail to prove it false.
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Two problems inherent in tests of hypotheses in economics are:
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1. The all-other-things-unchanged problem (Ceteris paribus) 2. The fallacy of false cause.
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Chapter 1 Summary
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Summary Choices are forced on us by scarcity; economists study the choices that people make. Scarce goods are those for which the choice of one alternative requires giving up another. The opportunity cost of any choice is the value of the best alternative forgone in making that choice. Some key choices assessed by economists include what to produce, how to produce it, and for whom it should be produced. Economics is distinguished from other academic disciplines that also study choices by an emphasis on the central importance of opportunity costs in evaluating choices, the assumption of maximizing behavior that serves the interests of individual decision makers, and a focus on evaluating choices at the margin. Economic analyses may be aimed at explaining individual choice or choices in an individual market; such investigations are largely the focus of microeconomics. The analysis of the impact of those individual choices on such aggregates as total output, the level of employment, and the price level is the concern of macroeconomics. Working within the framework of the scientific method, economists formulate hypotheses and then test them. These tests can only refute a hypothesis; hypotheses in science cannot be proved. A hypothesis that has been widely tested often comes to be regarded as a theory; one that has won virtually universal acceptance is a law. Because of the complexity of the real world, economists rely on models that rest on a series of simplifying assumptions. The models are used to generate hypotheses about the economy that can be tested using real-world data. Statements of fact and hypotheses are positive statements. Normative statements, unlike positive statements, cannot be tested and provide a source for potential disagreement.
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1. Sue purchases a CD of her favorite band for $13.48. With this money she could have purchased dinner for herself and two friends at Burger Heaven, seen a movie and had snacks, or bought a copy of a novel by her favorite author. Her opportunity cost of purchasing the CD is: A. the value of the missed movie, meal, and book. B. $13.48. C. zero, since she maximized her benefits by purchasing the CD. D. the value to her of whatever option she would have chosen if she had not purchased the CD.
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D. the value to her of whatever option she would have chosen if she had not purchased the CD. Opportunity cost is the value of the best alternative forgone in making any choice.
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2. Which of the following best explains why goods are scarce? A. People are greedy. B. The world’s resources are finite. C. Population growth is too fast for the world’s resources to support. D. Limited resources (at any particular point in time), relative to unlimited D. desires for goods and services.
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D. Limited resources (at any particular point in time), relative to unlimited Limited resources (at any particular point in time), relative to unlimited desires for goods and services creates scarcity.
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3. Martha’s Gas Emporium is offering a free tank of gas to every customer who gets a tune-up. Because the gas is being offered for free, A. the gas is not scarce. B. the gas must have been obtained without cost. C. the gas is a free good. D. None of the above is true.
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D. None of the above is true. Gas is definitely still a scarce good; Martha is simply absorbing the costs of the gasoline so that she can drum up more repair business for her garage. We assume that the costs of tune-ups will more than offset Martha’s gas costs or that she will gain more customers as a result of her offer; otherwise, she has made a poor economic decision.
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4. A community that wishes to use all available resources as efficiently as possible: A. runs recycling programs for all possible kinds of trash. B. turns off people’s air-conditioning automatically when the sun goes down. C. addresses the three economic questions of scarcity. D. is run by people with Ph.D.s in economics.
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C. addresses the three economic questions of scarcity. Any economically efficient system addresses the three economic questions of scarcity— what to produce? how to produce it? and to whom will production go? There’s no guarantee, though, that a system that addresses these questions will be efficient but it’s a start in confronting scarcity.
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5. In the United States, goods tend to be produced by processes that use many tools. In southeast Asia, production tends to use fewer tools but more labor. These choices are an example of: A. the mistakes some nations make. B. the solution to one of the fundamental economic questions. C. opportunity costs. D. free goods.
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C. the solution to one of the fundamental economic questions. The choices we confront as a result of scarcity raise three sets of issues every economy must answer. Those questions are what to make? how to make it? and who should get what is produced?
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6. Which of the following would best be considered a free good? A. Gasoline B. Mining rights to the planet Saturn C. Toilet paper D. Pizza
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B. Mining rights to the planet Saturn Since, as far as we know, no one lives on Saturn and it’s not likely that anyone will go there any time in the foreseeable future, signing away mining rights seems like a free good—one person holding such rights doesn’t stand in the way of others holding similar rights. The same principal is at work when people give away naming rights to stars, complete with certificates —no one else is held up from naming those same stars.
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1. Which of the following would be the best example of a marginal decision? A. A college student deciding whether or not to major in economics or philosophy. B. A business deciding whether or not to produce hammers. C. A restaurant owner deciding whether or not to stay open until midnight rather than 11 p.m. D. A heart patient deciding whether or not to have bypass surgery.
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C. A restaurant owner deciding whether or not to stay open until midnight rather than 11 p.m. This is a marginal decision—adding a relatively small amount (one hour) of business activity. Marginal analysis—studying incremental changes—lies at the heart of economics.
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2. All the following except _____ would involve a microeconomic focus. A. how the price of milk is determined B. how many people would ride a new public transit system C. why the rate of unemployment differs between the United States and Germany D. why the price of airline tickets is increasing
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C. why the rate of unemployment differs between the United States and Germany This question compares important overall measures of two different countries. Macroeconomics is the branch of economics that focuses on total, or aggregate, economic activity, which would include unemployment measures.
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3. Which of the following is the best example of a marginal decision? A. deciding to get married B. deciding to purchase an automobile C. deciding to purchase a second soda D. deciding to have a second child
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C. deciding to purchase a second soda Since you might drink quite a number of sodas in any particular day, this choice of answers comes the closest to being an economically marginal decision. Remember that “marginal” in an economic sense implies an incremental unit.
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4. “Consumer confidence is currently very high. This should lead to continued expansion in the level of output of the economy.” This statement is an example of A. a marginal choice. B. the type of topic typically addressed by macroeconomics. C. opportunity cost. D. the unimportance of considering decisions made at the margin.
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B. the type of topic typically addressed by macroeconomics. Macroeconomics deals with broad issues that affect the economy as a whole, usually including price levels (or inflation), employment levels, consumer buying and attitudes across the economy, output levels, and the like.
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1. Some argue that the scientific method does not apply to economics because A. economists disagree on some issues. B. economists disagree on all issues. C. it is difficult to prove or disprove an economic hypothesis because too many variables change at one time. D. all of economics is normative.
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A. economists disagree on some issues. Economists do disagree on some issues because they hold different values and because they can’t possibly test while controlling for every variable. While in laboratory sciences such as chemistry and biology, it is relatively easy to conduct experiments in which only selected things change and all other factors are held constant, the economists’ laboratory is the real world; thus, economists do not generally have the luxury of conducting controlled experiments.
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2. Which of the following statements is normative? A. An increase in the average workweek leads to economic growth. B. An increase in the average workweek leads to increased alcohol consumption. C. An increase in the average workweek leads to increased spousal abuse. D. An increase in the average workweek leads to a better life
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D. An increase in the average workweek leads to a better life The words “better life” implies a value judgment that may vary from one person to the next. In other words, the statement is normative.
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3. Normative statements are not scientifically testable because A. they are always incorrect. B. they are always correct. C. they discuss topics other than economics. D. they presume a value framework that is not subject to testing.
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D. they presume a value framework that is not subject to testing. People’s beliefs, reflected in normative statements, aren’t subject to testing. Any such tests would yield nonsensical results.
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4. A choice to direct more government spending toward education at the expense of reduced spending on the military A. may be informed by substantial positive analysis but ultimately reflects the normative decision of the nation’s leaders. B. is made without incurring opportunity cost. C. is not an example of a marginal decision. D. need not be made, because the government is not confronted by scarcity.
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A. may be informed by substantial positive analysis but ultimately reflects the normative decision of the nation’s leaders. A positive statement is a statement of fact which can be subjected to testing. Normative statements on the other hand, are based on the values of the person who makes them. They cannot be proven false.
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5. The scientific method establishes “laws” by A. consulting authorities who state what is correct. B. repeatedly testing a theory until the theory is nearly universally accepted. C. examining propositions that must be true. D. consulting ancient documents.
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B. repeatedly testing a theory until the theory is nearly universally accepted. Whether in the “hard” sciences such as biology, chemistry, geology and the like or in the social sciences like psychology, economics, or sociology, the scientific method uses repeated observations to establish “laws.”
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6. An economic theory holds that an increase in the amount of money in the economy leads to an increase in prices in the economy. By looking at the historical record for a country in a particular time period, we find that every time the amount of money has increased, prices have actually increased. This means that: A. the theory is definitely correct. B. the theory is definitely incorrect. C. the theory may be correct, but no theory can be proven true. D. the theory may be correct because of the fallacy of false cause.
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C. the theory may be correct, but no theory can be proven true. This relationship has been tested and has some support under certain circumstances. However, even if all the testing to date shows support for the relationship, it is never possible to prove it is true.
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Economic models simplify the world by holding most factors constant and focusing on only the factors of interest as they change.
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8. A model of the economy provides a guide to how the economy functions but does not provide a perfect description of the economy. Which of the following is not an advantage of using such a model? A. By not perfectly describing the economy, the model is made simpler and more comprehensible. B. By not perfectly describing the economy, the model is easier to manipulate to show how a change in one variable alters another variable. C. If the economy is not described perfectly, relevant but hard-to-understand parts of the economy may be ignored. D. If the economy is not described perfectly, irrelevant parts of the economy may be ignored.
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C. If the economy is not described perfectly, relevant but hard-to-understand parts of the economy may be ignored. The idea that relevant but hard-to-understand parts of the economy may be ignored is NOT an advantage of economic models. Economic models that leave out relevant information are simply not useful.
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9. If an increase in the price of gasoline always follows an increase in the price of ice cream, A. this is proof of a relationship between the variables. B. this relationship may mean nothing. Some relationships are not meaningful. C. this relationship demonstrates the concept of ceteris paribus. D. this relationship depicts a normative judgment.
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B. this relationship may mean nothing. Some relationships are not meaningful. Economists use special statistical tests that are designed to determine whether changes in one thing actually do cause changes observed in another. However, these tests do not always offer convincing evidence that persuades all economists that one thing does, in fact, cause changes in another. This may also be an example of fallacy of false cause.
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10. A model or theory in economics is A. based mostly on value judgments. B. built using relevant observations, assumptions, and abstractions. C. useful only if it correctly portrays the real world and its complexities. D. useful only if it is based on normative economic statements.
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B. built using relevant observations, assumptions, and abstractions. Economists use the most relevant ideas to build models, simplifying and leaving out irrelevant factors so that they can see more readily the relevant relationships they wish to study or establish.
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11. Disagreement between economists A. is proof that economics is not a science. B. would be eliminated by more definitive government action. C. is easy to eliminate by controlling all factors. D. may serve to spur innovation and exploration into economics.
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D. may serve to spur innovation and exploration into economics. Since it’s common for people to disagree about values, it’s not surprising that such disagreements extend to economists.
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12. Which one of the following statements can be tested by the scientific method? A. A contraction in the money supply causes an increase in interest rates. B. An increase in interest rates is bad for the economy. C. Having the government control interest rates is good. D. It is unfair for corporations to control so much of our economy.
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A. A contraction in the money supply causes an increase in interest rates. Many economic studies have shown a close connection between money supply contractions and increased interest rates. In fact, monetary officials use the money supply to manage interest rates. Since this statement is a positive one, that is, a statement that can be repeatedly tested, the scientific method can test the relationship. The other statements are opinions that cannot be tested.
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13. An economic model: A. provides a perfect description of the world. B. never deviates from reality by making simplifying assumptions. C. helps explain the functioning of the world around us. D. plays no role in hypothesis testing.
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C. helps explain the functioning of the world around us. Economic models simplify the world by holding most factors constant and focusing on only the factors of interest as they change.
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An economic model: A. provides a perfect description of the world. B. never deviates from reality by making simplifying assumptions. C. helps explain the functioning of the world around us. D. plays no role in hypothesis testing.
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C. helps explain the functioning of the world around us. Economic models simplify the world by holding most factors constant and focusing on only the factors of interest as they change.

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