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Mircoeconomics - Chapter 2 Thinking Like an Economist The...

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Chapter 2 – Thinking Like an Economist The Scientific Method: Observation, Theory, and More Observation - There’s interplay between theory and observation that occurs in the field of economics. - An economist might live in a country experiencing rapidly increasing prices and be moved by this observation to develop a theory of inflation. - The theory asserts that high inflation arises when the gov. prints too much money. - To test the theory, the economist would collect and analyze data on prices and money from many different countries. - If growth in the quantity of money were not at all related to the rate at which prices are rising, the economist would start to doubt the validity of the theory of inflation. - If money growth and inflation were strongly correlated in international data, he would believe the theory. The Role of Assumption - Assumptions can simplify the complex world and make it easier to understand. - To study the effects of international trade, we might assume that the world
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