ADVANCED MACROECONOMICS

SPRING 2020
INSTRUCTOR: BIBASWAN CHATTERJEE
ASSIGNMENT 4

DEADLINE: April 2, 2020, 1 pm (Beijing Time)

INSTRUCTIONS
1. All students must answer all questions unless otherwise indicated.
2. You may study together, but each student must solve and submit their own
assignment.
3. Submission deadlines are inflexible.
4. Failure to upload/submit the assignment close to the deadline due to
connectivity issues do not constitute an unexpected circumstance. Students
are advised to work on and submit assignments ahead of time.
5. Assignments should be submitted on ispace. If you have an emergency, you
may submit by emailing the TA.
6. When you upload an assignment on ispace, you must write your name,
student number and assignment number on the file name.
7. If you cannot upload to ispace, email your submission to the TA directly.

Total points: 50
1. Consider the Ramsey model as discussed in class. For the firm’s problem,
we know that,
𝑤 = (𝑓(𝑘̂ ) − 𝑘̂ 𝑓 ′ (𝑘̂ )) 𝑒 𝑥𝑡

Prove that this value of 𝑤 always ensures that the maximized per effective
labor profit of the firm is equal to zero.
[5 points]
2. Consider the Ramsey model as discussed in class. Recall that due to the two
dynamic equations used to compute the steady state values are given by,
𝑘̂̇ = 𝑓(𝑘̂ ) − 𝑐̂ − (𝑥 + 𝑛 + 𝛿) 𝑘̂ − (1)
𝑐̂̇ f ′ (𝑘̂ ) − 𝛿 − 𝜌 − 𝜃𝑥
= − (2)
𝑐̂ 𝜃
a. Find the steady state value for 𝑐̂ and 𝑘̂ . Your values for these variables
should be functions of only the parameters of the model. Clearly show
your calculations.
b. When the rate of time preference, 𝜌, increases, does the steady state value
of capital per effective labor increase or decrease? By how much? Clearly
show your calculations.

[(5+5) + 5 = 15 points]

3. In the Ramsey model as discussed in class, suppose you have the following
information about some parameters, from data.
𝜌 = 0.5, 𝑛 = 0.01, 𝑥 = 0.02, 𝜃 = 0.3
Without any calculus, explain if this model will have dynamic inefficiency
or not.

[5 points]
4. Consider a system of differential equations given by,
𝑥̇ = 2𝑥 + 5𝑦 + 2 (1)
𝑦̇ = 2𝑦 + 𝑥 + 1 (2)
a. Find the steady state equilibrium values. Clearly show your calculations.
b. Convert the system to homogeneous form. Clearly show your
calculations.
c. Compute the eigenvalues for the planar system. Clearly show your
calculations.
d. Based on the eigenvalues, can you say what type of equilibrium you have
for this system?
e. Without computing the eigenvalues, use the Jacobian matrix for the
planar system to identify the type of eigenvalues and the type of
equilibrium. Clearly show your calculations.

[5 + 5 + 5 + 1 + (2 + 2) = 20 points]

5. Consider the following system:

𝑦̇ 1 3 𝑦
( )=( )( )
𝑧̇ 2 8 𝑧
Without calculating the eigenvalues, identify the type of eigenvalues and the
type of equilibrium. Clearly show your calculations.

[5 points]