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    What is the role of models in economic analysis? How can it be determined if the assumptions underlying the design of an economic model are overly simplified or overly limiting? At what point do the assumptions invalidate the model? Why?

    The high rates of unemployment and business bankruptcies during the Great Depression of the 1930s caused a dramatic increase in government intervention in the economy of the United States. What was the original intent of this government intervention? What were the most significant microeconomic and macroeconomic effects of this government intervention? Why?


Subject Economics Pages 2 Style APA


Foundations and Models

Question 1A

            In Economic Analysis, models refer to the theoretical constructions that use a specific set of variables, quantitative relations and logic to represent an economic process (Howitt 2014). They are a simplified representations of economic workings based on certain assumptions and relationships. The primary roles of these models in the economic analysis are to simulate and forecast specific economic operations constructed on known economic behavior and taking some variables as given (Zenghelis et al. 2013). The main reason for using assumptions in economics is to simplify the complex economic process so that they can be easily studied and understood. Therefore, the simplicity of assumptions used in designing an economic model can be determined by their ability to only focus on the most significant variables. Economic assumptions invalidate a model when it produces accurate prediction or projections. This is because, in economic analysis, the validity of the model is based on the usefulness of its forecasts.

Question 1B

            Increased government intervention in the United States economy was witnessed after the Great Depression in the 1930s due to the high level of unemployment and bankruptcies that resulted from the crisis. Earlier, the government under President Herbert Hoover intervened by imposing more tariffs in an attempt to reduce the unemployment rate by reducing imported goods. This, however, increased the unemployment rate to double digits (Cole & Ohanian, 2010). When Franklin D. Roosevelt’s intervention policies came into existence, the Americans had agreed that the problem lied with the free market. Therefore, the government intervention intended to oversee and restrain both the financial markets and financiers. One of the effects of the government intervention was the attraction of investment. The government maintained a high-interest rate to attract international investors to the United States market (Richardson & Troost, 2014). The government’s intervention also necessitated the formation of a compensation scheme for the unemployed aged citizens through social security act of 1935. This increased their living standards that were significantly affected by the crisis.



Cole, H. L., & Ohanian, L. (2010). The Great Depression in the United States from a neoclassical perspective.

Howitt, R., Medellín-Azuara, J., MacEwan, D., Lund, J. R., & Sumner, D. (2014). Economic analysis of the 2014 drought for California agriculture. University of California, Davis, CA: Center for Watershed Sciences.

Richardson, G., & Troost, W. (2014). Monetary intervention mitigated banking panics during the great depression: quasi-experimental evidence from a Federal Reserve district border, 1929–1933. Journal of Political Economy, 117(6), 1031-1073.

Zenghelis, D. (2013). Why economic models tell us so little about the future. Business Green.



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