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(Section 18.1) Assume short-term interest rates are set in the way outlined in question 5. Investment expenditure is sensitive to yields on five-year bonds. For every 1 (100 basis points) rise in yields, investment expenditure falls by 0.5 . Consumption expenditure is also sensitive to yields. For every 1 rise in yields on five-year bonds, consumption falls by 0.25 . Government expenditure is unaffected by changes in yields. Initially investment spending and government spending are each 20 of...

The Frisch Slutsky Paradigm

We have already implicitly discussed the main ideas behind the Frisch-Slutsky paradigm when we drew an analogy between business cycles and reservoirs.6 The Frisch-Slutsky paradigm identifies three components in business cycle fluctuations as shown in Figure 14.10. The first component is an impulse or a shock that triggers business cycle fluctuations. In terms of our metaphor, the impulse is the pebble or automobile that is thrown into the reservoir. However, as in our metaphor, the fluctuations...

What Is Macroeconomics

What Macroeconomics

In this chapter we show you what macroeconomics is about by looking at some of the big questions that macro-economists ask Why do some countries enjoy a standard of living many times greater than others How does growth in productivity evolve over time Why does the economy fluctuate between expansions and contractions What impact do changes in interest rates or in oil prices have upon the economy We draw out what is distinctive about macroeconomics and contrast it with microeconomics, and...