ECON 102 Lecture Notes - Lecture 19: Exogeny, Loanable Funds, Factors Of Production
Document Summary
Simultaneous economic changes: one problem with using wars to test theories is that many economic changes can occur simultaneously. For example, in world war ii, while government purchases have increased dramatically, rationing also restricted the consumption of many goods. Furthermore, the government"s risk of war defeat and default on its debt presumably increases the interest rate that the government must pay. Economic models predict what happens when one exogenous variable changes and all other exogenous variables remain constant. However, multiple exogenous variables that change simultaneously in the real world. The natural experiments which economists must rely on are not always easy to interpret, unlike controlled laboratory experiments. Dt times the median tendency to consume mpc. The interest rate needs to increase for investment to fall. A reduction in taxes, like an increase in government spending, also crowds out expenditure and increases the interest rate: we may also evaluate the impact of a tax cut by trying to save and invest.
