Final answer:
In the dynamic AD–AS model, 'c. Expected inflation' is the endogenous variable, as it is determined within the model and changes in response to economic conditions.
Step-by-step explanation:
In the dynamic AD–AS (Aggregate Demand–Aggregate Supply) model, the variable that is considered endogenous is 'c. Expected inflation.' Endogenous variables are those that are determined within the model itself, while exogenous variables are determined outside the model and are inputs into the model. The natural level of output is built into the definition of potential GDP and does not change in the short run.
The central bank's inflation target is an exogenous policy variable, set by external authorities, such as the central bank. The natural rate of interest is also not endogenously determined in the AD/AS framework. However, expected inflation is influenced by past inflation rates and adaptive expectations, making it endogenous as it adjusts within the model in response to various economic forces.
The AD/AS model is a key analytical tool used to understand macroeconomic issues such as growth, unemployment, and inflation. It illustrates how shifts in AD or AS can lead to changes in the price level, output, and employment. For example, increases in exports or decreases in imports can shift AD, while changes in the costs of imported inputs like oil can shift AS. The model analyzes how these shifts can cause pressures for inflation to either increase or decrease.