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Question:
Describe a real or hypothetical situation that requires someone to make a policy decision. Then, select one of the three approaches to forecasting to apply: extrapolative, theoretical, or judgmental. Provide at least two reasons for your selection of the forecasting approach.
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Forecasts play a significant role in economic policy making because the economic consequences of a policy decision made today only unfold over time and the new system are typically intended to remain in place for some period. They are unavoidably fraught with uncertainty due to imperfect understanding and observation of the mechanisms and forces determining economic outcomes. Such modeling improvements will not only help explain past developments but also improve forecasting accuracy. The diversity of model and expert forecasts suggests that forecast heterogeneity and learning dynamics might play a significant role in propagating economic fluctuations.
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