Assume that used cars are an inferior good and new cars are a normal good. Because his money is invested in treasury bills, he is missing out on the generation of new wealth. Higher stock prices are leading to excessive rates of consumer saving. Given our complex economy, economic models must be complex if they are to provide insights. Economic models start with a set of propositions from which various assumptions are derived.
Economic models can aid policy makers in formulating policy and avoiding costly mistakes.
If the assumptions of a model are unrealistic, the model can be of no value.