Question 1

Economists at the Department of Finance in Ottawa employ an economic model that predicts the effects of an increase in the GST.After implementation of the change,suppose researchers find that the empirical data is in conflict with the model's prediction.They are likely to

Accepted Answer

When empirical data is in conflict with a model's prediction, it typically indicates that there is a flaw in the underlying assumptions or parameters of the model. Therefore, the best course of action would be to modify the model in light of the newly acquired empirical knowledge to create a more accurate and reliable representation of the real world. A and D are incorrect because they assume that the model is infallible and cannot be improved or revised. B and E are also incorrect because they suggest either ignoring or distorting the empirical data, which would undermine the credibility and validity of any findings or policy recommendations based on the model.

Question 2

Choose the answer that best explains why economists build models that abstract from the complexities of reality.

Accepted Answer

Economists build models that abstract from the complexities of reality because they believe they can gain a greater understanding of reality by simplifying it and isolating key factors. This allows them to analyze cause-and-effect relationships and make predictions within a controlled setting.

Question 3

The scientific approach is central to the study of economics.In economic theory,a prediction is

Accepted Answer

In economic theory, a prediction is a conditional statement of the following form: if A occurs, then B will follow. This means that a prediction is based on the relationship between two variables and can be tested using data and statistical methods. It is not a prophesy of how the future will unfold, nor is it based on the law of large numbers. A causal statement of the following form: A will occur because B occurred, may be true but it cannot be tested in the same way as a prediction.

Question 4

Suppose economists at the World Bank discover a positive correlation between family income and female education levels in developing countries.We can say that

Accepted Answer

The positive correlation between family income and female education levels suggests that an increase in female education levels can lead to an increase in family income. This is consistent with a theory that educating women can have positive spillover effects on their families and communities. While it is possible that an increase in family income could cause an increase in female education levels, the correlation between the two variables specifically suggests that the direction of causality may be from education to income. Therefore, choice E is the best answer.

Question 5

An economic model that contains a highly realistic set of assumptions is

Accepted Answer

Economic models with highly realistic sets of assumptions often become too complex and particularized, making them less useful for general application or understanding broad economic principles. Simplified models, despite having unrealistic assumptions, can be more effective in explaining general concepts and trends.

Question 6

In order to test a theory,one must

Accepted Answer

In order to test a theory, one must confront the predictions of the theory with evidence. This involves comparing the predictions of the theory with real-world observations or data to see if they match up. If the predictions do not match the evidence, then the theory may need to be revised or discarded.

Question 7

Suppose an individual wheat farmer's income is influenced by the region's average daily temperature.When examining the determinants of individual farmer income,the average daily temperature is a(n)________ variable.

Accepted Answer

The average daily temperature is an external factor that affects the individual farmer's income, so it is an exogenous variable.

Question 8

Suppose we have data for 1000 students for a period of one year.The data show that those students who spend more hours studying have a higher grade point average (GPA).We can say that

Accepted Answer

The data shows a positive correlation between hours of study time and GPA, indicating that as one variable increases, so does the other. However, correlation does not necessarily mean causation. The data does not definitively prove that spending more hours studying leads to a higher GPA (choice D) or that there is a causal relationship between the two (choice C). Additionally, the data does not support choice A or B.

Question 9

Economics is scientific because

Accepted Answer

The answer of Economics is scientific because
...

Question 10

If we seek to explain the number of seats sold on a particular air route,say Toronto to Halifax,over a one-year period,we would consider many variables.Which of the following variables would be endogenous to our theory?

Accepted Answer

The number of airline seats sold on this route is endogenous because it is directly related to the demand for air travel on this specific route. The other variables listed may have an indirect impact but are not directly related to the number of seats sold.

Question 11

Which of the following pairs of words have similar meanings?

Accepted Answer

The answer of Which of the following pairs of words...

Question 12

Economists build models that abstract from the complexities of reality because

Accepted Answer

Economists build models that abstract from the complexities of reality because they believe they gain a greater understanding of reality. By simplifying reality into manageable variables, economists can identify cause-and-effect relationships and study the impact of policy choices. This allows them to analyze and predict economic outcomes more efficiently.

Question 13

A hypothesis (or a prediction)is a statement about

Accepted Answer

A hypothesis (or a prediction) is a statement about how two or more variables are related to each other. It is an educated guess or proposed explanation for a phenomenon that can be tested through research.

Question 14

The scientific approach to economic inquiry involves

Accepted Answer

The scientific approach to economic inquiry involves testing predictions with empirical data to validate or refute economic models and theories.

Question 15

Choose the statement that best characterizes an economic theory.An economic theory

Accepted Answer

Economic theories are developed to explain and predict real-world phenomena. The usefulness of an economic theory is judged based on its ability to accurately explain observed economic phenomena and predict future outcomes. The underlying assumptions may not necessarily be realistic, but as long as the theory is logically consistent and produces accurate predictions and explanations, it is considered a valid economic theory. The inclusion of mathematical equations is not necessarily indicative of the accuracy of the theory, as sometimes simpler models may be more effective at explaining real-world outcomes. Additionally, not all human behavior is assumed to be rational in economic theories.

Question 16

Of the following,which is the most important characteristic of a successful theory?

Accepted Answer

While all of the options listed are important, the ability of a theory to predict behaviour accurately is likely the most important characteristic of a successful theory. This allows economists to make informed decisions and take appropriate actions based on the predictions of the theory. However, it should be noted that even the most successful theories may not always be accurate, as economic behaviour can be complex and influenced by numerous factors.

Question 17

When an economist assumes that the owners of firms are motivated only by the desire to maximize profits,the economist most likely believes that

Accepted Answer

The assumption that owners of firms are motivated only by the desire to maximize profits is a simplification used in economic models. While it may not be completely accurate, what matters is whether the theory built on the assumption provides useful predictions. The assumption allows for the analysis of the behavior of firms and their impact on the market, without considering other motivations and objectives that may differ across individuals.

Question 18

Suppose economists at the World Bank develop a theory with a prediction that increased levels of foreign aid lead to increases in per capita GDP in the recipient developing countries.They find empirical evidence that is consistent with this theory.The economists are able to conclude that

Accepted Answer

The economists can conclude that the theory is valid based on the empirical evidence they found. However, they should subject the theory to continued scrutiny to ensure its reliability and validity in different contexts and time periods. No economic theory can be proven correct beyond doubt, as economic phenomena are complex and influenced by multiple factors. Additionally, the economists cannot conclude that the theory is always reliable based on one set of empirical evidence. The evidence is not rejected by the theory, as it is consistent with it, and the assumptions used in the theory are not necessarily proven correct by the empirical evidence.

Question 19

Suppose a theory predicts that lowering tuition fees at Canadian universities will increase enrollment from low-income households.If empirical evidence is inconsistent with this prediction,then we

Accepted Answer

If empirical evidence is inconsistent with a theory's prediction, it means that the theory is not supported by the evidence and is therefore incorrect. Therefore, the theory needs to be amended or revised to better fit the empirical data. Testing the theory again or changing the empirical data will not fix the underlying problem with the theory. Similarly, changing the exogenous variables may not solve the issue if the core assumptions of the theory are flawed. Lastly, increasing tuition fees would be counterproductive to the original goal of increasing enrollment from low-income households.

Question 20

Suppose a particular theory predicts that on Monday,Wednesday,and Friday the stock market will rise and that on Tuesday and Thursday the stock market will fall.If an economist tests this theory and finds that over a six-month period the theory predicts accurately,the economist would likely say that the theory

Accepted Answer

The economist would likely say that the theory "is not in conflict with the evidence" because the theory's predictions matched the actual outcomes over the tested period. This does not prove the theory correct beyond doubt (as future evidence might contradict it), but it does indicate that the theory's predictions were consistent with observed events during the test period.

Quiz 2: Economic Theories, data, and Graphs