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.
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
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.
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
