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Advanced Macroeconomics Part 2 Problem Set 2

This document contains two questions regarding macroeconomic models. Question 1 models household consumption and capital accumulation over time with efficiency growth. It asks the reader to: (1) derive an expression for the capital accumulation equation, (2) rewrite the utility maximization problem in terms of normalized consumption and capital, (3) derive the growth rate of consumption using a Hamiltonian, and (4) discuss whether a restriction is needed on the discount rate. Question 2 models household consumption and capital accumulation over time with population growth and foreign aid transfers. It asks the reader to: (1) derive a capital accumulation equation accounting for aid, (2) derive the consumption growth rate using a Hamiltonian, (3) show steady-state capital is independent of

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42 views1 page

Advanced Macroeconomics Part 2 Problem Set 2

This document contains two questions regarding macroeconomic models. Question 1 models household consumption and capital accumulation over time with efficiency growth. It asks the reader to: (1) derive an expression for the capital accumulation equation, (2) rewrite the utility maximization problem in terms of normalized consumption and capital, (3) derive the growth rate of consumption using a Hamiltonian, and (4) discuss whether a restriction is needed on the discount rate. Question 2 models household consumption and capital accumulation over time with population growth and foreign aid transfers. It asks the reader to: (1) derive a capital accumulation equation accounting for aid, (2) derive the consumption growth rate using a Hamiltonian, (3) show steady-state capital is independent of

Uploaded by

christina0107
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ADVANCED MACROECONOMICS

Part 2 Problem Set 2

QUESTION 1
Consider a representative household which can accumulate capital, and which chooses
the path of consumption to maximize lifetime utility:
Z
c(t)1 t
max e dt
c(t) t=0 1

subject to a capital accumulation (resource) constraint. c denotes consumption per


capita, and is the discount rate. Use to denote the depreciation rate. You should
assume the production function has constant returns to scale and can be written in in-
tensive form as y = f (k), where y Y /AL, k K/AL, K is capital, A is efficiency,
and L is labour. The level of efficiency grows at a constant rate x, so A(t) = A(0)ext .
Assume A(0) = 1. The population is constant, and > 0, > 0 and 0 < < 1.
a) Defining c c/A, explain why k = f (k) c (x + )k.
b) Rewrite the maximization problem in terms of k and c = cext .
c) Using a Hamiltonian, derive the growth rate of consumption per capita.
d) Briefly discuss whether a restriction on is needed for the problem to be well-
defined.
QUESTION 2
This question allows population growth, and assumes that all households receive a
foreign aid transfer. There is no technical progress. Consider a representative household
which chooses the path of consumption to maximize the total utility of the household:
Z
c(t)1
max L(t)et dt
c(t) t=0 1

subject to a capital accumulation constraint. The population L(t) is growing at a con-


stant rate n, so L(t) = L(0)ent . c denotes consumption per capita. Use D to denote
total aid flows, which grow at the same rate as population, and are distributed equally
across households. is the discount rate, and is the depreciation rate. You should
assume the production function has constant returns to scale and can be written in in-
tensive form as y = f (k), where y Y /L, k K/L and K is capital. You should
assume > 0, > 0 and 0 < < 1.
a) Explain why k = f (k) + d c (n + )k where k K/L and d D/L.
b) Using a Hamiltonian, derive the growth rate of consumption per capita.
c) Show that the steady-state k is independent of the level of aid.
d) Discuss whether the result obtained in part c) indicates that aid is ineffective.

END OF PROBLEM SET

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