10. Sensitivity of the Results to the Interest Elasticity of Aggregate Expenditure An important issue in an macroeconomic model is the interest elasticity of aggregate expenditure. How much do consumption and investment respond to changes in interest rates? How much would the properties of the model change if the responses were different? These questions can be analyzed by running different experiments. We first consider the case in which the interest elasticity of consumer expenditures for durable goods is larger. We then explore the case in which the interest elasticity of nonresidential fixed investment equation is larger. Experiment 10.1: Experiment 6.1 with more Interest Elastic Consumer Expenditures Change the eighth coefficient in equation 3 to be twice its size in absolute value. Solve the model for the forecast period. Call this dataset BASEA. Take BASEA as your base dataset, take RS to be exogenous, and increase RS by 1 in each quarter of the forecast period. Solve the model for the forecast period. Call this dataset NEWA. Answer the following questions by comparing NEWA to BASEA. Note that as in Experiment 9.1 a new base dataset had to be created because a coefficient was changed. The predictions of the new version of the model are not the same as the predictions in BASE, and so a new base dataset had to be created. Again, it is not of interest to compare the predicted values in a dataset like BASEA with the values in BASE. They differ, but only because a coefficient estimate has been arbitrarily changed. Compare these results with those of Experiment 6.1. Explain the differences carefully. Experiment 10.2: Experiment 6.1 with more Interest Elastic Capital Stock Change the ninth coefficient in equation 12 to be twice its size in absolute value. Solve the model for the forecast period. Call this dataset BASEA. Take BASEA as your base dataset, take RS to be exogenous, and increase RS by 1 in each quarter of the forecast period. Solve the model for the forecast period. Call this dataset NEWA. Answer the following questions by comparing NEWA to BASEA. Compare these results with those of Experiment 6.1. Explain the differences carefully. In particular, how does the behavior of nonresidential fixed investment, IKF, differ? Remember that IKF is equal to the change in the capital stock plus depreciation (equation 92).