Author Question: Assume that the research team of a major company is building a model of consumer demand that ... (Read 107 times)

go.lag · **on:** Jun 29, 2018

Assume that the research team of a major company is building a model of consumer demand that contains approximately 250 variables. Can you think of a principle that might be violated here that was discussed in chapter 1? Explain.

What will be an ideal response?

Question 2

If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not?

What will be an ideal response?

akpaschal · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The principle that is probably being violated is Ockham's Razor. This is the idea that irrelevant data should be cut away. With 250 variables it is very likely that many of them are unnecessary and will only make the model more complicated.

Answer to Question 2

If workers accurately predict the rate of inflation, then they will incorporate wage adjustments into their contracts that will take inflation into account. The result is no change in the real wage, and no change in the unemployment rate, indicating that there is no trade-off between inflation and unemployment. Instead, the Phillips curve would be vertical.