G. Menges developed the following econometric model for the West German economy:

where Y = national income

I = net capital formation

C = personal consumption

Q = profits

P = cost of living index

R = industrial productivity

t = time

u = stochastic disturbances

a. Which of the variables would you regard as endogenous and which as exogenous?

b. What is the reason behind including the variable P in the consumption function?

Y; = Bo + Bi Y,-1 + B2l. + u1: I, = B3 + B4Y, + s Q; + uz C; = B6 + B7 Y, + B3C;_1 + B9 P; + u3t Q, = B10 + B1Q,-1+ B12 R, + u4t