Give a macroeconomic example of the ceteris paribus assumption theory.

1 Answer | Add Yours

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

In economics, the term ceteris paribus means something like "all other things being equal."  What it means is that we are assuming that only the variable that we care about will change and all other possible variables will remain constant.

Looking at macroeconomics, we can say something like "if the Fed lowers interest rates, businesses will borrow more money, ceteris paribus."  We are assuming that the only things that change are the interest rates and the amount of money being borrowed.  Of course, there are many other things that could change.  For example, the Fed could lower interest rates at the same time that Greece leaves the euro zone.  If Greece does this, businesses in the US might fear a global recession and actually borrow less money.  When we make our "ceteris paribus" statement, we are assuming that things like Greece leaving the euro will not happen.

The ceteris paribus assumption, then, is that only the variables that we are interested in will change while other variables remain constant.

 

Sources:

We’ve answered 318,919 questions. We can answer yours, too.

Ask a question