Economics Exogenous Variables Affect Endogenous Variables Worksheet
Description
This course examines further issues on the determination of the equilibrium level
of national income and its allocation among consumers, investors and government. Particular
attention will be paid to the role of government policy on macroeconomic equilibrium for an
open and closed economy. Additional issues to be discussed include government debt and
deficit, investment, money demand and money supply, unemployment, economic fluctuations,
and growth. We will also discuss business cycles: recessions, depressions, revivals, expansions.
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Name: __________________________ Date: _____________
1. In an economic model:
A) exogenous variables and endogenous variables are both fixed when they enter the
model.
B) endogenous variables and exogenous variables are both determined within the
model.
C) endogenous variables affect exogenous variables.
D) exogenous variables affect endogenous variables.
2. What is the difference between sticky prices and flexible prices? Explain.
3. Which of the following is the best example of a sticky price?
A) the price of a barrel of oil
B) the price of the U.S. dollar in terms of euros
C) the price of a share of stock
D) the price of a soda in a vending machine
Why?
4. Which of the following is the best example of a flexible price?
A) the price of a cup of coffee in a coffee shop
B) the price of gasoline at a service station
C) the price of a ticket at a movie theater
D) the price of a book in a bookstore
Why?
5. How does the distinction between flexible and sticky prices impact the study of
macroeconomics?
A) The study of flexible prices is confined to microeconomics, while macroeconomics
focuses on sticky prices.
B) Macroeconomists use flexible prices to explain inflation and sticky prices to
explain unemployment.
C) Flexible prices are typically assumed in the study of the long run, while sticky
prices are assumed in the study of the short run.
D) Endogenous variables are measured using flexible prices, while exogenous
variables are measured using sticky prices.
6. a. Define Long Run and Short Run in macroeconomics, and explain how prices and total
output (Y) behave in each situation.
b. Draw the Long Run Aggregate Supply Curve (LRAS). Show the impact of a fall in
demand on prices and output (Y), graphically and with words.
c. Draw the Short Run Aggregate Supply Curve (SRAS). Show the impact of a fall in
demand on prices and output (Y), graphically and with words.
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7. a) Explain the Classical Model of the Long Run using graphs and equations for the market
for goods and services. Carefully explain the components: what determines supply, demand, and
prices.
b) Explain the Classical Model of the Long Run using graphs and equations for the market
for loanable funds. Carefully explain the components: what determines supply, demand, and
prices.
8. Use analysis the Classical model to explain the impact of a fiscal policy in the long run. More
specifically, suppose that the government approves a package to help the economy by increasing
government spending in 1 trillion dollars. Assume that the economy starts from equilibrium:
a) What are the effects of this policy in the long run on savings, investment, consumption, real
output, real interest rates, investment, savings, and consumption?
b) Show it graphically using the market for loanable funds (Hint: r in the Y-axis and I, S in the
X-axis).
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