Answer to Question #228609 in Macroeconomics for Bianca

Question

impact of the demand management policies using AD-AS framework

Explain the relationship between endogenous and exogenous variables in the labor market

Answer 1

(1)The two main demand management policies are:

• Monetary policy
• Fiscal policy

They affect the level of aggregate demand in an economy.

Fiscal policy involves change in government expenditure and taxation. For instance during a recession, the government could employ expansionary fiscal policy by cutting down income tax so as to increase disposable income of consumers and boost their spending and hence an increase in aggregate demand.

Monetary policy involves cutting or increasing interest rates. For instance, in a recession, interest rates should be made lower to boost the rate of borrowing and hence improve consumer spending and investment. This will also improve export demand because the value of exchange rate will also be reduced.

(2)

An endogenous variable is a dependent variable that relies on a n economic or statistical mode. Changes in the endogenous variable is as a result in changes in other variables that are in the same model as the endogenous variable.

An exogenous variable depends on external factors that are not within the economic model at hand.

In the labor market in reality, variables are usually partly endogenous and partly exogenous.

Examples of exogenous variables in the labor market are population and size of labor force.

Examples of endogenous variables in the labor market are Nominal wage rate and rate of unemployment.