Question

Economic models, such as the circular-flow model: a. capture the important elements of the problem under study. b. predict phenomena without explaining them. c. explain phenomena without predicting them. d. distort reality in order to improve forecasting ability. e. include every detail and interrelation among variables that are being analyzed.

Answer 1

Answer:

The correct answer is the letter a. capture the important elements of the problem under study.

Explanation:

Economic models are built to simplify complex problems by focusing on the most important variables. The circular flow of income, for example, shows the flow of goods and services, and the flow and currencies between households, businesses, and government in aggregate, that is, all production and consumption by these agents in a given country. Thus, the income stream seeks to understand the important elements of income creation and distribution in a given economy.