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

Question

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.

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 
 B 
 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 
 B 
 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 
 B 
 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 
 D 
 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

Priyanka2018 · Answer

Hi,

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

Thanks in advance

Skywalker18 · Answer

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.

Hi  Priyanka2018 ,
Hope this helps!

JayPatadiya · Answer

Can you plz explain Q4, I am not able to understand how the reference text (few would think the same of slower monetary growth) can be considered the most surprising finding?

mafuz · Answer

JayPatadiya ! please read this line ...  slowing  the growth of the money supply would result in slightly  higher  inflation ( in the end of first paragraph). This statement has been repeated in the answers D ( slower  monetary expansion would  worsen  inflation).

Now please read the portion in second paragraph... while most  view escalating oil costs as inflationary,  few would think the same of slower monetary growth . The author is expressing others view that although it might true that escalating oil costs may cause inflation, Monetary growth (monetary expansion) might not worsen (increase) inflation.

So among the answer choices D presents this line of thought. Others are contradictory to the findings.

richirish · Answer

Good passage, 4 mins all correct, curious to see the difficulty levels  SajjadAhmad

Happy to assist folks if needed.

govindarathi4 · Answer

For the first question, as the passage indicates that the models proposed by N and R are more of indicators for pitfalls (in the second para) in the formal theory and not really that great for predictions in the real world, it indicates the criticism.

For third, it says that though other values that were derived from the simulations using the model (Over 14 years in the past) matched closely with the real values, the model still wasn’t helpful is drafting policies. (Refer to the ‘not clear cut’ which means abstract)

Posted from my mobile device

Sajjad1994 · Answer

Question #1: 700
Question #2: 650
Question #3: 600
Question #4: 700

Overall: 650-700

Good Luck

ricardorr04 · Answer

7.5 mins 4/4 correct. easy read if you are familiar with the topic.

jusexploring · Answer

Can somebody explain why is optoin (E) is incorrect in Question 1?
I felt 'overly formal' was an extreme way of describing the model in option (B) and hence I eliminated that.

Sajjad1994 · Answer

Explanation

1. The author is primarily concerned with

Difficulty Level:   700

Explanation

In the given passage, the author discusses the relevance of formal economic models to real-world policy and uses the example of the economists R. D. Norton and S. Y. Rhee's work on applying such a model to the Korean economy. The author's main concern is to critique the approach of relying too heavily on formal economic models and highlight their limitations when it comes to practical policy implications.

The passage begins by mentioning that the relevance of formal economic models to real-world policy is a topic of dispute. The success of Norton and Rhee's model in retrospectively matching real statistics from the Korean economy is acknowledged, but the passage goes on to note that the model's value in terms of guiding policy decisions is not clear-cut.

The key evidence for the primary concern of the author can be found in the following passage:

"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."

This statement clearly indicates that the author is criticizing the formalist approach of economic modeling that prioritizes statistical accuracy (goodness of fit) over actual policy relevance. The author is suggesting that the Norton-Rhee model's success in matching real statistics doesn't necessarily translate into practical policy insights.

While the passage does touch on the accuracy of Norton and Rhee's analysis, the primary focus is on critiquing the formalist approach to economic modeling and highlighting the limitations of using such models for policy decisions. Therefore,  option (B) "criticizing an overly formal economic model"  better captures the main concern of the author in the context of the passage.

Options (A), (C), (D),  and  (E)  do not accurately reflect the primary concern of the author, which is to critique the limitations and potential drawbacks of relying on overly formal economic models for shaping economic policies.

Answer: B

JoeKan1234 · Answer

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

E is wrong.

The author says in the final para that the formalist approach can have pitfalls. The author's attitude towards the model is not absolute. Therefore, he does not determine the accuracy of the analysis.

VerbalBot · Answer

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