As others have said, Word's doing it right. Adding an empty line is wrong, and there should be a space after paras. As someone who reads lots of Word docs in my job (university lecturer) I'm glad that before long students using the defaults will be submitting properly formatted texts!

You could, as has been said, use shift-return for a line break without starting a new paragraph or set up a new style, but honestly, don't - Word is right!

(If only they'd automatically get rid of two spaces after a full stop (period) then it would be perfect!)

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