Choosing models and judging data and assumptions in an unseen theme

Overview

Recall questions on choosing microeconomic or macroeconomic models for an unseen theme, checking data and graphs, correlation and causation, and judging model assumptions.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   When you meet an unfamiliar economic theme, what should you identify before reaching for any model?

   Model answer

   Identify what is being allocated and to whom, which economic agents are involved, and what constraint or trade-off they face; the appropriate model then follows from the problem rather than the theme being forced into a familiar diagram.

2. 2

   State two signals in an unseen theme that macroeconomic treatment is needed rather than microeconomic.

   Model answer

   The theme refers to economy-wide aggregates such as the general price level, national output, total unemployment or the exchange rate, and its scope is a whole economy or comparison between economies rather than a single market, firm or product.

3. 3

   A theme reports that rents in a large city have risen sharply. Which microeconomic model would you select, and what would it show?

   Model answer

   A demand and supply diagram for the city's rental housing market, showing rent on the vertical axis and quantity of rented accommodation on the horizontal axis, with a rightward shift of demand or a leftward shift of supply raising the equilibrium rent.

4. 4

   A theme reports a sudden surge in world energy prices. Which macroeconomic model would you select, and what would it show?

   Model answer

   An aggregate demand and aggregate supply diagram, in which higher input costs shift short-run aggregate supply leftwards, so the price level rises while real output falls.

5. 5

   State one microeconomic and one macroeconomic strand you would analyse if the theme were a newly introduced carbon tax.

   Model answer

   Microeconomically, the tax raises producers' costs and shifts market supply leftwards so that the external cost of emissions is internalised and output moves towards the socially optimal level. Macroeconomically, higher costs add to cost-push pressure on the price level, the revenue changes the government's budget position, and the policy bears on long-run sustainable growth.

6. 6

   Explain how a microeconomic market failure can be linked to a macroeconomic policy objective in a single argument.

   Model answer

   If workplace training is under-provided because firms cannot capture all its benefits, the resulting shortfall in skills holds down labour productivity, which limits long-run aggregate supply and therefore the economy's potential growth; the intervention that corrects the market failure is simultaneously a supply-side policy.

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