Which of the following statements about an economic model is true?

• A. An economic model is a simplified representation of reality used to analyze economic issues.
• B. Economic models are only used for normative analysis.
• C. Economic models always include every real-world variable to ensure accuracy.
• D. Economic models cannot be tested using real-world data.

Answer: (A)

Verified step by step guidance

1. Understand the definition of an economic model: it is a simplified representation of reality designed to analyze economic issues and make predictions.
2. Recognize that economic models are used for both positive (descriptive) and normative (prescriptive) analysis, so the statement that they are only used for normative analysis is false.
3. Know that economic models do not include every real-world variable; instead, they focus on key variables to simplify complex realities, so the statement about including every variable is incorrect.
4. Be aware that economic models can be tested and validated using real-world data through empirical methods, which means the statement that they cannot be tested is false.
5. Conclude that the true statement is the one describing an economic model as a simplified representation of reality used to analyze economic issues.