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The relevance of formal economic models to real-world policy has been

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The relevance of formal economic models to real-world policy has been  [#permalink]

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New post 23 Apr 2019, 08:30
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New Project RC Butler 2019 - Practice 2 RC Passages Everyday
Passage # 163, Date : 23-APR-2019
This post is a part of New Project RC Butler 2019. Click here for Details


The relevance of formal economic models to real-world policy has been a topic of some dispute. The economists R. D. Norton and S. Y. Rhee achieved some success in applying such a model retrospectively to the Korean economy over a fourteen-year period; the model’s figures for output, prices, and other variables closely matched real statistics. The model’s value in policy terms, however, proved less clearcut. Norton and Rhee performed simulations in which, keeping long-term factors constant, they tried to pinpoint the effect of short-term policy changes. Their model indicated that rising prices for imported oil would increase inflation; reducing exports by five percent would lower Gross Domestic Product and increase inflation; and slowing the growth of the money supply would result in slightly higher inflation.

These findings are somewhat startling. Many economists have argued that reducing exports will lessen, not increase, inflation. And while most view escalating oil costs as inflationary, few would think the same of slower monetary growth. The Norton-Rhee model can perhaps be viewed as indicating the pitfalls of a formalist approach that stresses statistical “goodness of fit” at the expense of genuine policy relevance.
1. The author is primarily concerned with

(A) proposing a new type of economic analysis
(B) criticizing an overly formal economic model
(C) advocating the use of statistical models in determining economic policy
(D) suggesting an explanation for Korean inflation
(E) determining the accuracy of Norton and Rhee’s analysis



2. The author mentions “a fourteen-year period” (Highlighted) in order to

(A) indicate how far into the future Norton and Rhee’s model can make accurate predictions
(B) acknowledge the accuracy of Norton and Rhee’s model in accounting for past events
(C) explain the effect of reducing exports on inflation
(D) demonstrate the startling nature of Norton and Rhee’s findings
(E) expose the flaws in Norton and Rhee’s model



3. The most significant criticism leveled against Norton and Rhee’s model is that it

(A) excludes key statistical variables
(B) is too abstract to be useful in policy making
(C) fails to adjust for Korea’s high rate of inflation
(D) underestimates the importance of economic growth
(E) fails to consider the effect of short-term variations in the economy



4. It can be inferred that the most surprising finding of the Norton-Rhee study is that

(A) reducing exports would reduce inflation
(B) high oil prices worsen inflation
(C) an increase in exports can slow the rate of growth
(D) slower monetary expansion would worsen inflation
(E) long-term factors do not affect economic growth



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Re: The relevance of formal economic models to real-world policy has been  [#permalink]

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New post 24 Apr 2019, 08:09
Hi,

Can someone please explain the reason behind question 1 and 3?

Thanks in advance
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Re: The relevance of formal economic models to real-world policy has been  [#permalink]

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New post 25 Apr 2019, 10:08
All correct in 7 mins 20 seconds, including 3 mins 20 seconds to read

Para 1- relevance of formal economic models to real-world policy, Norton-Rhee model
Para 2- startling findings, pitfalls of a formalist approach

1. The author is primarily concerned with
(A) proposing a new type of economic analysis- incorrect, the author does not make any proposals
(B) criticizing an overly formal economic model- Correct
(C) advocating the use of statistical models in determining economic policy- incorrect, the author does not advocate the use of statistical models
(D) suggesting an explanation for Korean inflation- too narrow a scope
(E) determining the accuracy of Norton and Rhee’s analysis- incorrect

2. The author mentions “a fourteen-year period” (Highlighted) in order to
(A) indicate how far into the future Norton and Rhee’s model can make accurate predictions- incorrect, the model was used retrospectively
(B) acknowledge the accuracy of Norton and Rhee’s model in accounting for past events- Correct
achieved some success in applying such a model retrospectively to the Korean economy over a fourteen-year period; the model’s figures for output, prices, and other variables closely matched real statistics.
(C) explain the effect of reducing exports on inflation- irrelevant
(D) demonstrate the startling nature of Norton and Rhee’s findings- incorrect
(E) expose the flaws in Norton and Rhee’s model- incorrect

3. The most significant criticism leveled against Norton and Rhee’s model is that it
(B) is too abstract to be useful in policy making

The model’s value in policy terms, however, proved less clearcut.

4. It can be inferred that the most surprising finding of the Norton-Rhee study is that
(A) reducing exports would reduce inflation- incorrect, the model claims that reducing exports by five percent would lower Gross Domestic Product and increase inflation
(B) high oil prices worsen inflation- incorrect- this is not startling
(C) an increase in exports can slow the rate of growth- incorrect
(D) slower monetary expansion would worsen inflation- correct, few would think the same of slower monetary growth.
(E) long-term factors do not affect economic growth- incorrect

These findings are somewhat startling. Many economists have argued that reducing exports will lessen, not increase, inflation. And while most view escalating oil costs as inflationary, few would think the same of slower monetary growth.

Priyanka2018 wrote:
Hi,

Can someone please explain the reason behind question 1 and 3?

Thanks in advance


Hi Priyanka2018,
Hope this helps!
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Re: The relevance of formal economic models to real-world policy has been   [#permalink] 25 Apr 2019, 10:08
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