Exogenous and endogenous variables: Difference between revisions

Revision as of 18:31, 5 March 2019

Revision as of 18:35, 5 March 2019

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==Sub-models and models==

An economic variable can be exogenous in some models and endogenous in others. In particular this can happen when one model also serves as a component of a broader model. For example, the [[IS-LM|IS]] model of only the goods market derives the market-clearing (and thus endogenous) level of [[output (economics)|output]] depending on the exogenously imposed level of [[interest rate]]s, since interest rates affect the [[physical investment]] component of the demand for goods. In contrast, the [[IS-LM|LM]] model of only the money market takes income (which [[identity (mathematics)|identically]] equals output) as exogenously given and affecting [[money demand]]; here equibriumequilibrium of money supply and money demand endogenously determines the interest rate. Moreover, the IS model and the LM model can be combined to give the [[IS-LM model]], in which both the interest rate and output are endogenously determined.

[[Category:Technical terminology]]