.
1. Which of the following statements are correct?
a. Marginal propensity to consume and autonomous consumption are exogenous variables of the consumption
function.
b. Nominal money supply and the part of the demand for money that is influenced by expectations, business
confidence, and political and social factors are exogenous variables in the financial market.
c. Marginal propensity to consume and the level of output and income are endogenous variables in the goods
market model.
d. Investment spending is an exogenous variable in the goods market model but in the IS-LM model the part of
investment spending that is dependent on the level of output and income and the interest rate are endogenous
components of the variables.
e. Level of output and income, interest rate, investment spending, consumption spending are exogenous variables
in the IS-LM model.
f. Taxes, government spending and the nominal supply of money are exogenous variables in the IS-LM model.
1. a, b, c and d
2. b, c, e and f
3. Only a, b and f
4. a, b, d and f
5. b, d and e
The correct option is 4.
Statement a is correct. See the summary below.
Exogenous and endogenous variables of the consumption function
Remember that an exogenous (autonomous) variable is independent of the endogenous variable – the variable we are trying
to explain. An exogenous (autonomous) variable influences the endogenous variable, but it is not influenced by the
endogenous variable.
In the model that we are developing, the endogenous main variable is the level of output and income (Y).
A variable can contain both an exogenous (autonomous) and an endogenous component. In this way consumption spending
(C) has an exogenous (autonomous) component (co) as well as an endogenous component (YD).
The endogenous variable in the consumption function is that part of consumption spending which changes if the level of
output and income changes. It is represented as a movement along the consumption function.
The variables that are independent from the level of output and income in the consumption function are therefore autonomous
and are the following:
Autonomous consumption (c0), which is influenced by variables other than output and income. A change in this variable
shifts the curve.
Marginal propensity to consume (c) which is our behavioural coefficient. A change in the marginal propensity to consume
changes the slope of the consumption function.
Endogenous variables Exogenous variables
C = co + cYD C = co + cYD
The YD part of the consumption function is the The autonomous (exogenous) variables in the
endogenous component. consumption function are co and c.
Statement b is correct. See the summary below.
Page 1 of 21
1. Which of the following statements are correct?
a. Marginal propensity to consume and autonomous consumption are exogenous variables of the consumption
function.
b. Nominal money supply and the part of the demand for money that is influenced by expectations, business
confidence, and political and social factors are exogenous variables in the financial market.
c. Marginal propensity to consume and the level of output and income are endogenous variables in the goods
market model.
d. Investment spending is an exogenous variable in the goods market model but in the IS-LM model the part of
investment spending that is dependent on the level of output and income and the interest rate are endogenous
components of the variables.
e. Level of output and income, interest rate, investment spending, consumption spending are exogenous variables
in the IS-LM model.
f. Taxes, government spending and the nominal supply of money are exogenous variables in the IS-LM model.
1. a, b, c and d
2. b, c, e and f
3. Only a, b and f
4. a, b, d and f
5. b, d and e
The correct option is 4.
Statement a is correct. See the summary below.
Exogenous and endogenous variables of the consumption function
Remember that an exogenous (autonomous) variable is independent of the endogenous variable – the variable we are trying
to explain. An exogenous (autonomous) variable influences the endogenous variable, but it is not influenced by the
endogenous variable.
In the model that we are developing, the endogenous main variable is the level of output and income (Y).
A variable can contain both an exogenous (autonomous) and an endogenous component. In this way consumption spending
(C) has an exogenous (autonomous) component (co) as well as an endogenous component (YD).
The endogenous variable in the consumption function is that part of consumption spending which changes if the level of
output and income changes. It is represented as a movement along the consumption function.
The variables that are independent from the level of output and income in the consumption function are therefore autonomous
and are the following:
Autonomous consumption (c0), which is influenced by variables other than output and income. A change in this variable
shifts the curve.
Marginal propensity to consume (c) which is our behavioural coefficient. A change in the marginal propensity to consume
changes the slope of the consumption function.
Endogenous variables Exogenous variables
C = co + cYD C = co + cYD
The YD part of the consumption function is the The autonomous (exogenous) variables in the
endogenous component. consumption function are co and c.
Statement b is correct. See the summary below.
Page 1 of 21
