Economic Models

Read this section on the reasoning behind economic models, which are just representations of reality or theoretical thinking for understanding something. Pay attention to the explanation about the Circular Flow Diagram (Figure 2), which represents how the economy and its actors are related to one another. Make sure to answer the quiz questions.

Try It

Answer to Try It

    • graphically
      Incorrect. While a graph would provide a view of the direction of the relationship, the magnitude of the relationship is difficult to capture visually.
    • mathematically
      Correct. Using math, both the direction of the relationship and its magnitude are more easily determined.
    • by creating a model
      Incorrect. While a graph would provide a view of the direction of the relationship, the magnitude of the relationship is difficult to capture visually.