thinking like a economist

Homework #2
1. How is economics like a science?
Answer: Scientists, in economy, try to explain the world. They employ the scientific method, the dispassionate development and testing of theories about how the world works.

2. Why do economics make assumptions?
Answer: Because assumptions simply the complex world, and make it easier to understand. It is usually unrealistic, but it is simple to learn and it gives useful insights about the real world.

3. Should an economic model describe reality exactly?
Answer: No. A model is a highly simplified representation of a more complicated reality. Economists use models to study economic issues.

4. Draw and explain a production of possibilities frontier for an economy that produces milk and cookies. What happens to this frontier if disease kills half of the economy’s cow population?
Answer: Curve 1 represents the PFF before the cow’s disease. Curve 2 represents the PFF after the cow’s disease. It decreases the production of both milk and cookies, because cows provide milk, which is necessary for production of both goods.

5. Use a production possibilities frontier to describe the idea of “efficiency”.
Answer: Efficiency means that all resources are fully utilized. Points on the PPF represent efficiency. Points under the PFF represent not efficiency, because some resources are underutilized. Points above the PFF are not possible, because they require more resources that are available.
6. What are the two subfields into which economics is divided? Explain what each subfield studies.
Answer: Microeconomics and Macroeconomics. Microeconomics is responsible for the study of how households and firms make decisions and how they interact in markets. Microeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.
7. What is the difference between a positive and a normative statement? Give an example of each.
Answer: Economists make positive statements as scientists, which attempt to describe the world as it is. In the other hand, economists make normative statements as policy advisors, which attempt to prescribe how the world should be.
8. What is the Council of Economic Advisers?
Answer: Is an agency within the Executive Office of the President that advises the President of the United States on economic policy

9. Why do economists sometimes offer conflicting advice to policymakers?
Answer: It can happen for a couple of reasons. First, they sometimes disagree about the validity of alternative positive theories about the world. Also, They may have different values and, therefore different normative views about what policy should try to accomplish.
10. The President's Council of Economic Advisers -- Go to http://whitehouse.gov/cea . What does the Council of Economic Advisors do? Who are the members of the Council and who is the chair? The Council of Economic Advisers, an agency within the Executive Office of the President, is charged with offering the President objective economic advice on the formulation of both domestic and international economic policy. The Council bases its recommendations and analysis on economic research and empirical evidence, using the best data available to support the President in setting our nation's economic policy.
The Council is currently comprised of a Chairman and two Members. The Chairman is Jason Furman. The Council's members are Betsey Stevenson and Jim Stock. A staff of professional senior economists, staff economists and research assistants, as well as a statistical office supports the Council.