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IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features

Which statement best reflects the institutional school of economics in its approach to analysing firms and markets?

Institutional economics holds that economic behaviour is shaped by evolving institutions, customs and legal rules, so analysis should be historical and empirical rather than purely deductive. It rejects the idea that rational individuals acting in frictionless markets explain everything.

  1. AMarkets always clear instantly, so institutions such as laws and norms are irrelevant
  2. BEconomic behaviour is shaped by evolving institutions, customs and legal rules, so analysis should be historical and empirical rather than purely deductiveCorrect
  3. COnly the money supply growth rate determines output in the long run
  4. DAggregate demand alone determines output and the state should never intervene
  5. Individuals are always perfectly rational utility maximisers with complete information

Explanation

Institutional economists such as Veblen and Commons stress that habits, laws, organisations and customs shape behaviour and evolve over time. They favour empirical and historical study over abstract deduction. The other options describe neoclassical, monetarist or Keynesian views.

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