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    Econ90003 ps1

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    Thiago Henrique
    Questions about macroeconomics

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    Econ90003 ps1

    Uploaded by

    Thiago Henrique
    18 views2 pages
    Questions about macroeconomics

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    econ90003_ps1

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    Questions about macroeconomics

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    18 views2 pages

    Econ90003 ps1

    Uploaded by

    Thiago Henrique
    Questions about macroeconomics

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    Macroeconomics

    Chris Edmond

    Macroeconomics: Problem Set #1


    Due Tuesday March 26 in class

    1. Simple difference equations. Consider the linear difference equation

    xt+1 = x̄ + a (xt − x̄), t = 0, 1, 2, . . . , x0 ∈ R given

    (a) Give a complete account of the possible dynamics of xt implied by this linear difference
    equation. Explain how these dynamics depend on the value of the parameter a. Do these
    dynamics depend on the value of the initial condition x0 ? Explain.

    Now consider the nonlinear difference equation

    xt+1 = a xt (1 − xt ), t = 0, 1, 2, . . . , x0 ∈ [0, 1] given, a ∈ (0, 4]

    (b) Show that, for this difference equation, xt lies in [0, 1] for all t.
    (c) How many steady states does this difference equation have? How do these depend on the
    parameter a?
    (d) Give as complete an account as you can of the possible dynamics of xt implied by this
    difference equation. Explain how these dynamics depend on the value of the parameter a.
    Do these dynamics depend on the value of the initial condition x0 ? Explain.
    Hint : Consider the special cases

    a ∈ { 0.5 , 1.5 , 2.5 , 3.0 , 3.5 , 4.0 }

    2. Numerical dynamic programming by value function iteration. Consider the infinite-


    horizon growth model. The planner chooses capital stocks kt+1 for t = 0, 1, . . . to maximize
    ∞
    X
    β t u(ct ), 0<β<1
    t=0

    subject to the sequence of resource constraints

    ct + kt+1 ≤ f (kt ) + (1 − δ)kt , 0<δ<1

    with given initial condition


    k0 > 0

    (a) Let v(k) denote the value function for this problem. Setup and explain the Bellman
    equation that determines v(k).
    Macroeconomics: Problem Set #1 2

    Now suppose that the period utility function has the isoelastic form

    c1−σ − 1
    u(c) = , σ>0
    1−σ
    and that the production function is

    f (k) = zk α , 0<α<1

    (b) Solve for the steady state values c∗ and k ∗ . What is the steady state capital/output ratio?
    What is the steady state consumption/output ratio? What is the steady state savings
    rate? How does this compare to the ‘golden rule’ savings rate for this economy? Explain.
    How if at all do your answers depend on the value of σ? Explain.
    (c) Now let z = 1, α = 0.3, β = 1/1.05, δ = 0.05 and σ = 1. Using these parameter values,
    discretize the state space on a grid of n = 1001 points calculate and plot the value function
    v(k) on this grid of points. Let c(k) be the associated policy function for consumption.
    Calculate and plot c(k) for these parameter values. How does the savings behavior implied
    by this policy function compare to the steady-state savings rate from part (b)? Explain.
    (d) Now suppose the economy is at steady state then suddenly at t = 0 the productivity level z
    permanently increases from z = 1 to z 0 = 1.05. Calculate and plot the new value function
    and consumption policy function associated with z 0 . Explain how these compare to the
    ones you found in part (c). Calculate and plot the transitional dynamics of the economy
    as it adjusts to its new long-run values. In particular, calculate and plot the time-paths of
    capital and consumption until they have converged to their new steady state levels. Use a
    phase diagram to explain these transitional dynamics.
    (e) How if at all would your answers to parts (b) through (d) change if σ was lower, say
    σ = 0.5? Or higher, say σ = 2? Give intuition for your answers.

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