The relevance of formal economic models to real-world policy

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.

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”
(line 6) 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

abhijit_sen · Answer

1) B (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.)
2) B (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)
3) B (The model’s value in policy terms, however, proved less clearcut.)
4) D (while most view escalating oil costs as inflationary, few would think the same of slower monetary growth)

x97agarwal · Answer

1.E

First hint: "The relevance of formal economic models to real-world policy  has been a topic of some dispute" . Second: These findings are somewhat  startling. . Third: Many economists  have argued  that reducing exports ....... Fourth:The Norton-Rhee model  can perhaps be viewed  as indicating the pitfalls

2.B
3.B
4.D
For these I agree with Abhijit's explanations.

marshpa · Answer

For me..
1>b
2>b
3>b
4>d
But after reading explaination by x97 I am not sure about 1.

The relevance of formal economic models to real-world policy

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