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Why do the economists in the following scenario disagree?Suppose that an economist from...

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mavig | Student, Grade 11 | (Level 2) Honors

Posted September 17, 2012 at 10:35 PM via web

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Why do the economists in the following scenario disagree?

Suppose that an economist from a university in Montreal argues that a government bailout of severely distressed financial firms is unnecessary because free markets will properly price assets, while another economists from a school of industrial relations argues that without a bailout distressed financial firms, the economy will experience a deep recession.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted September 17, 2012 at 10:49 PM (Answer #1)

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These economists disagree because, especially in macroeconomics, it is very difficult to isolate causes and effects.  There are simply too many variables to allow economists to easily do this.  Economists cannot run controlled experiments where they change one variable while holding everything else constant (as in the ceteris paribus assumption).

These economists simply cannot know what impact a bailout or lack thereof will have.  They could study other cases where firms have or have not been bailed out.  But these cases will not be exactly the same as the case now being faced.  Therefore, the two economists can come to different conclusions as to what will really happen in this particular case.

Therefore, the two economists can disagree because the ceteris paribus assumption does not typically apply in real life.

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