Thinking Like an Economist Review

Economists, like mathematicians, physicists, and biologists,

• make use of the scientific method.

• try to address their subject with a scientist’s objectivity

• devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories.

• all of the above are correct

With respect to how economists study the economy, which of the following statements is most accurate?

• Economists study the past, but they do not try to predict the future.

• Economists use “rules of thumb” to predict the future

• Economists devise theories, collect data, and analyze the data to test the theories

• Economists use controlled experiments in much the same way that biologists and physicists do

Economists face an obstacle that many other scientists do not face.  What is that obstacle?

• It is often difficult and sometimes impossible to perform experiments in economics

• It is often difficult to formulate theories in economics

• Economics cannot be addressed objectively; it must be addressed subjectively

• The scientific method cannot be applied to the study of economics

For an economist, the idea of making assumptions is regarded generally as a

• bad idea, since doing so leads to the omission of important ideas and variables from economic models.

• bad idea, since doing so invariably leads to data-collection problems.

• good idea, since doing so helps to simplify the complex world and make it easier to understand.

• good idea, since economic analysis without assumptions leads to complicated results that the general public finds hard to understand.

A circular-flow model and production possibilities frontier are similar in that

• neither allows economic analysis to occur

• neither can be represented visually on a graph

• both make use of assumptions

• both make use of complex equations to arrive at solutions.

A model can be accurately described as a

• theoretical abstraction with very little value

• device that is useful only to the people who created it

• realistic and carefully constructed theory

• simplification of reality

The circular-flow diagram

• is an economic model

• incorporates two types of decision makers: households and firm

• represents the flows of inputs, outputs, and dollars

• All of the above are correct.

Which of the following statements about the circular-flow diagram is correct

• One must imagine that the economy operates without money in order to make sense of the diagram.

• The diagram leaves out details that are not essential for understanding the economic transactions that occur between households and firms

• The government cannot be excluded as a decision maker in a circular-flow diagram

• All of the above are correct

In the simple circular-flow diagram, the participants in the economy are

• firms and government

• households and firms

• households and government

• households, firms, and government

Which statement is NOT correct, In the circular-flow diagram, firms produce

• goods and services using factors of production.

• output using inputs

• factors of production using goods and services