ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Another example of an exogenous economic variable is interest rates. As only central banks can alter interest rates, businesses cannot directly affect them, even though these rates can impact their business models.

Detailed explanation-2: -In the LM model of interest rate determination, the supply of and demand for money determine the interest rate contingent on the level of the money supply, so the money supply is an exogenous variable and the interest rate is an endogenous variable.

Detailed explanation-3: -Commercial banks set the interest rate on loans (the policy rate plus a markup) and accommodate the demand for loans, so money is endogenous.

Detailed explanation-4: -Exogenous variable example External factors like crop-eating pests and the weather would be exogenous variables. This is because other variables in the model can ‘t affect these variables. They can cause more or fewer crops to grow, but the crops can’t affect them in return.