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12. Economic models Suppose an economist theorizes that the price level in the economy is directly related to the money supply, or the amount of money in circulation in the economy. The economist proposes the following relationship: P=AXM - P = Price Level 0 M = Money Supply 0 A = A composite of other factors, including real GDP, that change very slowly over time. What method could an economist use to gather empirical data in order to test the proposed relationship between money and the price level? Unlike researchers in the hard sciences, economists cannot study complex relationships using data. An economist would look for data on past changes in the money supply and note the resulting changes in the price level. Economists do not usually develop theoretical models of the economy but only analyze summary statistics about the current state of the economy. An economist would persuade the Federal Reserve to change the money supply to various levels, and observe the resulting changes in the price level. 13. The circular-flow model The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Markets for Goods and Services Firms Households Markets for Factors of Production Based on this model, households earn income when purchase V in factor markets.Suppose Amy earns $525 per week working as a pilot for Wingies. She uses $8 to take a yoga class at Big Bend. Big Bend pays Van $275 per week to instruct yoga. Van uses $225 to purchase international ights from Wingies. Identify whether each of the following events in this scenario occurs in the factor market or the product market. Event Factor Market Product Market Amy earns $525 per week working for Wingies. Van spends $225 to purchase international ights from Wingies. Amy spends $8 to take a yoga class. Which of the elements of this scenario represent a flow from a rm to a household? This could be a flow of dollars, inputs, or outputs. Check all that apply. The $275 per week Van earns working for Big Bend The $225 Van spends to purchase international flights from Wingies The yoga class Amy receives Amy's labor 14. Sources of data In the following table, indicate whether the researcher in the scenario is collecting experimental data or observational data. Experimental Observational Scenario Data Data An oncologist randomly assigns rats into two groups, giving one group a new drug intended to fight cancer and giving the other group a placebo, in order to study the effects of the new drug. A sociologist conducts interviews with former protestors and activists in order to study the struggles of the civil rights movement. A pediatrician randomly assigns babies to two different groups, giving one group a new type of infant formula and the other group conventional formula, in order to study the effects of the new formula. All else equal, economists are more likely to have access to V data than to V data. 15. The different types of data Suppose you have the following data set, which shows information about the inflation rate and unemployment rate for a particular country in each quarter from 1990 to 2019. The following is an example of such a data set. Inflation Unemployment Rate Time Period (Percent) (Percent) Q1 1990 2.1 4.1 Q2 1990 2.4 4.2 Q4 2019 4.5 6.1 The previous data set can best be classified as a V data set