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Monetary Policy within the IS-LM Framework by Shahdad Naghshpour

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Chapter 12

Conclusion

As in other sciences, economic theories depend on the assumptions that are used in their formation. Even the simplest economic concepts are based on specific assumptions. For example, the downward sloping demand curve is based on the assumption that the good is not a Giffen good. One might consider cases such as Giffen goods as exceptions to the rule, which exist in every branch of science. However, attempting to test the validity of a theory without consideration of its assumptions is misleading. Recall from Chapter 11 the importance of assuming the existence of a vacuum and a lack of friction in the physics theory that claims all objects fall at the same rate. Examinations of economic theories without regard to the underlying ...

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