Problem Set 50-1
1. Consider an economy in equilibrium in the G&S market.
Suppose investment demand decreases, ceteris paribus. What is the effect on equilibrium GNP?
Now suppose investment demand decreases, but ceteris paribus does not apply because at the same time government demand rises. What is the effect on equilibrium GNP?
In general, which of these two assumptions, ceteris paribus or no ceteris paribus, is more realistic? Explain why.
If ceteris paribus is less realistic, why do economic models so frequently apply the assumption?
©2004 Steven M. Suranovic, ALL RIGHTS RESERVED
Last Updated on 9/13/04