Given the following model:

Question

Y = C + I⁰ + G⁰
C = a + by (a>0, 0<b<1)
a. How many endogenous variables are there?
b. Identify the endogenous variables
c. Which one of the above are exogenous variables?
d. What are parameters in the above models?
e. Explain the main of b in the model above?

Answer 1

a. There are 3 endogenous variables in the model: Y, C, and I⁰.

b. The endogenous variables are Y, C, and I⁰.

c. The exogenous variables in the model are G⁰ and the parameters a and b.

d. The parameters in the above models are a and b.

e. In the model, the parameter b represents the marginal propensity to consume (MPC). It shows the proportion of additional income that a consumer will spend on consumption. In other words, it indicates how much of a change in income will lead to a change in consumption.