Consider the following statements about macroeconomic models:
(A) When the determination of one variable is studied, all the other variables are allowed to change freely.
(B) Ceteris paribus literally means ‘other things remaining equal’.
(C) Holding the other variables constant is like solving one equation for x in terms of y, and then substituting it into the other equation.
(D) Models try to explain questions such as what causes recessions, a rise in the price level or a rise in unemployment.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (B), (C) and (D) only
(A) When the determination of one variable is studied, all the other variables are allowed to change freely. — Incorrect. To study one variable, the values of all other variables are held constant.
(B) Ceteris paribus literally means ‘other things remaining equal’. — Correct. This is the assumption used when other variables are held constant.
(C) Holding the other variables constant is like solving one equation for x in terms of y, and then substituting it into the other equation. — Correct. Solving for x in terms of y and then substituting is the same idea.
(D) Models try to explain questions such as what causes recessions, a rise in the price level or a rise in unemployment. — Correct. Models try to explain slow growth or recessions, a rise in prices and a rise in unemployment.
NCERT (2026-27): “… The basic objective of macroeconomics is to develop theoretical tools, called models, capable of describing the processes which determine the values of these variables. Specifically, the models attempt to provide theoretical explanation to questions such as what causes periods of slow growth or recessions in the economy, or increment in the price level, or a rise in unemployment. It is difficult to account for all the variables at the same time. Thus, when we concentrate on the determination of a particular variable, we must hold the values of all other variables constant. This is a stylisation typical of almost any theoretical exercise and is called the assumption of ceteris paribus, which literally means ‘other things remaining equal’. You can think of the procedure as follows – in order to solve for the values of two variables x and y from two equations, we solve for one variable, say x, in terms of y from one equation first, and then substitute this value into the other equation to obtain the complete solution. We apply the same method in the analysis of the macroeconomic system.” |