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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.
The aim of this paper is to observe and interpret the correlations between oil price changes, and changes to key macroeconomic indicators. From this we will be able to observe if t
Use the following general linear demand relation: Qd = 680 - 9P + 0.006M - 4PR where M is income and PR is the price of a related good, R. If M = $15,000 and PR = $20 and the suppl
Marginal propensity to SPEND refers to: a. a nation's additional spending on a good per an additional unit of expenditure. b. a nation's additional consumption based on a unit incr
The United States postal service report 95% of first class mail within the same city is delivered within two days of the time of mailing. Six letters are randomly sent to different
Suppose that Lilistan has two types of citizens: low-income citizens (income = $20,000) and high-income citizens (income = $80,000). Interest income is currently taxed and each typ
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The demand for textbooks is Q=200-P+25U-50Pbeer. Assume that the unemployment rate U is 8 and the price of beer P beer is $2. When the average price of a textbook is P=$100, the el
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Real Exchange Rates (EXCH) is the next variable that will be analysed in this VAR. The reason for including exchange rates in the VAR is that they are an important channel through
Examine the graph below. The mayor has placed a $2 tax on the sale of each taco sold within the city. How large is the decrease in producer surplus?
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