Evaluating a Policy Decision Based on an Economic Model

Analyzing Policy Failure

A government's economic advisors use a model to forecast the impact of a new trade tariff. The model assumes that domestic consumers will not change their purchasing habits in response to price increases. Based on this model, the government implements the tariff, expecting a large increase in revenue. In reality, consumers are highly sensitive to price changes. What is the most likely outcome resulting from this flawed model?

Identifying Flaws in Economic Forecasting

Match each flawed assumption in an economic model with its most likely negative policy outcome.

If an economic model used for policy decisions accurately predicts short-term economic growth but is built on an assumption that ignores significant long-term environmental damage, the policy derived from it can be considered successful.

Critiquing a Housing Market Model

A government's use of an economic model to inform a new policy results in an unexpected and severe economic downturn. Arrange the following events into the most logical sequence to illustrate how a flawed model could lead to such a negative outcome.

A government implements a large tax cut for corporations, based on an economic model predicting that the corporations will use the extra funds to significantly increase worker wages. However, after the policy is enacted, most corporations use the money for stock buybacks and executive bonuses, with minimal impact on wages. Which fundamental flaw in the economic model is most likely responsible for this policy failure?

Critiquing and Improving an Economic Model