3. Identify the exogenous and endogenous variables in the investment demand equa
ID: 1132521 • Letter: 3
Question
3. Identify the exogenous and endogenous variables in the investment demand equation I = I(bar) +aY - bi.
4. Suppose the economy's ability to produce increases over time. This is indicated in Fig. 1-10 by the shift of aggregate supply from AS1 to AS2 to AS3 to AS4, where AS1 represents supply in year 1; AS2 supply in year 2; AS3 supply in year 3 and AS4 supply in year 4. Find output and the price level in year 1 through 4 when prices are flexible and adjust rapidly to changes in supply and/or demand and aggregate demand increases from AD1 in year 1, to AD2 in year 2, to AD3 in year 3, and to AD4 in year 4.
5. Suppose the economy's ability to produce increases over time. This is indicated in Fig. 1-10 by the shift of aggregate supply from AS1 to AS2 to AS3 to AS4, where AS1 represents supply in year 1; AS2 supply in year 2; AS3 supply in year 3 and AS4 supply in year 4. Suppose that prices are not flexible and remain at p0. Find output for year 1 through 4 when prices do not adjust to changes in supply and/or demand and aggregate demand increases from AD1 in year 1, to AD2 in year 2, to AD3 in year 3, and to AD4 in year 4.
PRICE LEVEL (p) AS AS ASAS Po PI AD AD AD 2 ADI OUTPUT) Fig. 1-10Explanation / Answer
(3)
An exogenous variable is an independent variable that does not depend on other variables in a system. Therefore, I(bar), a, b, Y and i are exogenous variables.
An endogenous variable is a dependent variable that depends on other variables in a system. Therefore, I is the endogenous variable since it depends on all other parameters.
(4) With price flexibility,
(Price, Output) in year 1 = (p0, y1) [Corresponding to intersection of AD1 and AS1 at point A]
(Price, Output) in year 2 = (p0, y2) [Corresponding to intersection of AD2 and AS2 at point B]
(Price, Output) in year 3 = (p1, y4) [Corresponding to intersection of AD3 and AS3 at point D]
(Price, Output) in year 4 = (p2, y6) [Corresponding to intersection of AD4 and AS4 at point F]
(5) With no price flexibility,
(Price, Output) in year 1 = (p0, y1) [Corresponding to intersection of AD1 and AS1 at point A]
(Price, Output) in year 2 = (p0, y2) [Corresponding to intersection of AD2 and AS2 at point B]
(Price, Output) in year 3 = (p0, y3) [Corresponding to intersection of AD3 and p0 at point C]
(Price, Output) in year 4 = (p0, y5) [Corresponding to intersection of AD4 and p0 at point E]
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