4. Consider the standard Ramsey model where the planner chooses time paths for the representativeagent's consumption c(t) and capital k(t) to solvefe-mu(c(t))dtsubject to k(t) = Aƒ(k(t), L) — c(t)k(0) > 0 given, L> 0 givenmaximisewhere f(,) exhibits diminishing returns to capital, u() satisfies standard assumptions, A is a multiplicativetechnology parameter, and L is the labour supply.(a) At date 0 information is revealed that there will be a (temporary) increase A at date t₁, andthat at t₂ (where t2 > t₁ > 0 ) A will be decreased to its initial level and will remain there forever. Analysethe economy's response regarding consumption, capital accumulation, GDP, and capital's marginal product(equal to the competitive equilibrium interest rate) over time under the following two conditions:Initially, at date 0, the capital stock is at its steady state level.Initially, at date 0, the capital stock is larger than its steady state level.(b) Discuss the differences in the economy's response between the above two parts.

In the given Ramsey model, the planner aims to maximize the discounted utility of consumption over…

(a) At date 0 information is revealed that there will be a (temporary) increase in A at date t₁, and that at t₂ (where t₂ > t₁ > 0) A will be decreased to its initial level and will remain there forever. Analyse the economy's response regarding consumption, capital accumulation, GDP, and capital's marginal product (equal to the competitive equilibrium interest rate) over time under the following two conditions: Initially, at date 0, the capital stock is at its steady state level. Initially, at date 0, the capital stock is larger than its steady state level. (b) Discuss the differences in the economy's response between the above two parts.

(a) At date 0 information is revealed that there will be a (temporary) increase in A at date t₁, and that at t₂ (where t₂ > t₁ > 0) A will be decreased to its initial level and will remain there forever. Analyse the economy's response regarding consumption, capital accumulation, GDP, and capital's marginal product (equal to the competitive equilibrium interest rate) over time under the following two conditions: Initially, at date 0, the capital stock is at its steady state level. Initially, at date 0, the capital stock is larger than its steady state level. (b) Discuss the differences in the economy's response between the above two parts.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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