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We have now reached the second part of this book. The first interest rate was a description of the macroeconomic variables and institutions. In the second part, we will analyze how these variables fit together and present models that explain the main macroeconomic variables.

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In describing these trends, we have been asked several times what the nature of the market failure is. The answer seems fairly clear. There is no major market failure in the way economists normally use the term.

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In the postcrisis environment, issues of sustainability in the trajectory of the U.S. economy have come to the fore. Among the problems pointed to are a large current account deficit, the paucity of household savings, overleveraging in the financial and household sectors, and stagnation of middleclass incomes.

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The classical model was a term coined by Keynes in the 1930s to represent basically all the ideas of economics as they apply to the macroeconomy starting with Adam Smith in the 1700s all the way up to the writings of Arthur Pigou in the 1930s.

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When you borrow money, you usually have to pay a fee for the loan. This fee is often called interest, particularly if the fee is proportional to the amount you borrow. The interest rate is commonly expressed as a percentage of the size of the loan per unit of time, typically per year.