In the Appendix to Chapter 4, the equations of the IS and LM curves are given as follows:
IS: Y = k(Aʹp - br)
LM: Y = [(Ms/P) + fr]/h
Here, k = 1/[s(1 - t) + t + nx].
Let Aʹp = Cʹa - Ta + Iʹp + G + NXa, where Cʹa is that part of consumption spending that is independent of both Y and r, is similarly defined, and the other terms are as defined in the Appendix to Chapter 3.
(a) List the exogenous variables (and parameters) in this model.
(b) List the endogenous variables in this model.
(c) List the target variables in this model.
(d) List the variables that make up the policy instruments in this model.
(e) What is the relationship, if any, between endogenous variables and target variables in this model?
(f) What is the relationship, if any, between exogenous variables and policy instruments in this model?
In answering this question, use only the variables in the IS and LM equations and the variables defining k and Aʹp. For example, don’t include a variable such as structural employment policy as a policy instrument or the unemployment rate as a target variable; they are not variables in the preceding model, even though they are listed in Figure 14-1 as a policy instrument and target variable, respectively.