Building an economic model based on the assumption of a small open economy is useful because:
A) it accurately describes the U.S. economy.
B) it is more complicated and realistic than a model based on the assumption of a large open economy.
C) this simplifying assumption can assist our understanding and intuition of open economy macroeconomics.
D) it is not possible to build models of large open economies.

Question

Quizplus · Accepted Answer

The assumption of a small open economy simplifies the model and assists with understanding and intuition of open economy macroeconomics, without compromising its accuracy in describing real-world economies. Option A is incorrect because the US economy is not necessarily accurately described as a small open economy. Option B is incorrect because a model based on the assumption of a large open economy would be more complicated than a small open economy model. Option D is incorrect because models of large open economies can be built, but the assumption of a small open economy is a simplifying one that can be useful in certain contexts.

Building an Economic Model Based on the Assumption of a Small