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The final and most important part of the methodology is the impulse response functions which will provide the most information with regards to the aim of the project. In order to analyse the variables response to an oil price shock, the VAR has to transform into its Moving Average representation. The moving average representation is necessary to find the impulse response function of the VAR model. In this project I will assess the impulse responses using the typical Cholesky Decomposition. From these responses, future responses of each variable to a shock in oil price can be analysed. Impulse responses display the response of the future values of each variable to a one standard deviation oil price shock, whilst making the assumption that the shock normalises and returns to zero in subsequent periods. Furthermore it is assumed that all other errors are also zero. The underlying thought behind shocking one variable whilst ensuring that the others remain constant is the most effective way of measuring the impact of an oil price shock on other macroeconomic variables. Therefore this section will form the strongest case as to whether natural oil price shocks impact positively or negatively on the key macroeconomic variables in the UK.
Factors Responsible for changes in Aggregate Demand The Aggregate Demand curve shows an inverse relationship between the quantity of goods and services demanded and the price l
Q. Describe the classical model of macroeconomics? 'The classical model' was a term coined by Keynes in the 1930s to signify essentially all the ideas of economics as they appl
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. (40 points) Consider two consumers, A and B. A and B both want perfect consumption smoothing (c = cf) and both have no current wealth. However, the two consumers have different i
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