You explain to your friend Haslina, who runs a catering service called "Meals in a Zip," about an economic theory which asserts that consumers will purchase less of a product at higher prices than they will at lower prices. She contends that the theory
is incorrect because over the past two years she has raised the price of her catered meals and yet has seen a brisk increase in sales. How would you respond to Haslina?
A) Haslina is right; she has evidence to back her claim. The theory must be erroneous.
B) I will explain to her that she is making the error of reverse causality: it is the increase in demand that has enabled her to raise her prices.
C) I will explain to her that there are some omitted variables that have contributed to an increase in her sales such as changes in income.
D) Haslina is making the mistake of assuming that correlation implies causation.
Answer: C
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If the monetary policy curve is correct, then policy makers care only about inflation and not at all about aggregate output and unemployment. Comment
What will be an ideal response?