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Typically, the number of endogenous variables in a macroeconomic model is A

Economics Dec 14, 2020

Typically, the number of endogenous variables in a macroeconomic model is

A. smaller than the number of equations in the model.

B. greater than the number of equations in the model.

C. equal to the number of exogenous variables in the model.

D. None of the above.

Expert Solution

The correct answer is C.

Typically, the number of endogenous variables in a macroeconomic model is (C) equal to the number of exogenous variables in the model.

Endogenous and exogenous variables refer to the dependent and independent variables in a given equation, respectively. The endogenous variables function in relation to the action of another variable in the equation. The endogenous variables are always equal to the independent variables (exogenous) since they depend on them for action; hence they cannot be greater or lesser. However, the endogenous variables may lead to an opposite direction reaction, same direction reaction, or one-way reaction. This means that an increase in one variable may lead to a decrease in the other, an increase can lead to a corresponding rise, or only one variable is affected but cannot affect the other variable (no mutual relations).

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