Question

Consider the following version of the IS-LM model: Goods Market:

Y=C+I+G
C=40+1/2Y−1/4T−1/5 T²
I=20−2i
G=1/4T+1/5T²
Money Market: Md=4Y−1/2i
What are the endogenous and exogenous variables (here include G as endogenous)?

Answer 1

In the given IS-LM model, the endogenous variables are Y, C, I, and G, while the exogenous variables are T and the coefficients of the equations. To find the equilibrium for this economy, equate the aggregate demand (AD) to the aggregate supply (AS).

Step-by-step explanation:

In the given IS-LM model, the endogenous variables are those variables that are determined within the model. In this case, the endogenous variables are Y (output), C (consumption), I (investment), and G (government spending).

The exogenous variables, on the other hand, are external to the model and are taken as given. In this case, the exogenous variables are T (taxes) and the coefficients of the equations.

To find the equilibrium for this economy, you need to equate the aggregate demand (AD) to the aggregate supply (AS). AD is given by: AD = C + I + G + (X - M), where C, I, G, X, and M are as defined in the question.