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Q:

What are limitations to the Solow model?

A:

lack of microfoundations (especially the savings decision - "people are told what to do")

Q:

What are the assumptions in the Solow model?

A:

- constant returns to scale in K & L
- f(k) is concave - bow-shaped in the argument k
- effective labour is AL

Q:

What is the definition of a balanced growth path?

A:

It occurs when all variables of the model are growing at a constant rate.

Q:

What is the steady state in Solow?

A:

constant K/Y even though there is growth in advanced economies

Q:

What are the parameters in the optimisation problem in Solow?

A:

- Investment
- Consumption
- Saving

Q:

What is the Golden rule? (Solow)

A:

- the optimal savings rate to maximise the steady state consumption per capita
- set f'(k) = g + delta + n (slope of capital widening line)

Q:

What are the key characteristics of the Ramsey model?

A:

- continuous time
- no overlapping generations (more precisely, no new, disconnected generations, no immigrants)
- maximise the utility of a representative individual in a dynasty at t = 0

Q:

What are the key characteristics in the OLG model?

A:

- discrete time t = 0,1,2,... (Solow is continuous)
- two overlapping generations (young people work, old people don't)
- worker in first period, capitalist in second
- time-separable (utility of today is independent of tomorrow)
- constant returns in capital and labour
- generations are bound together by gains from exchange
- people like to smooth consumption

Q:

How does capital accumulation work in the Ramsey model?

A:

Yt - Ct - deltaKt

(depreciation occurs instantaneously at delta)

- capital K is the resources constraint (you've got to accept k0, which is different in Germany than it is in China)
- make sure that capital does not grow faster than marginal utility at time t (otherwise the optimisation would not have worked)

Q:

What is the Keynes-Ramsey Rule?

A:

- the rate of increase in consumption depends (ceteris paribus), on the elasticity of inter-temporal substitution - how readily a household is willing to substitute consumption tomorrow for consumption today

Q:

What are the dynamics in Ramsey?

A:

- c.t = 0 (f'(k) = d + delta + phita)
- law of motion for c: when c.t > 0, k goes down and vice versa
- law of motion for k.t = 0: f(kt) - ct - (n+delta)Kt
- choose the right path that leads you to the steady state
- choose consumption in such a way that it leads you to the optimal point

Q:

What is included in the savings rate?

A:

- savings from households, firms and maybe government (25% in Germany, 40% in China, 20% in USA)
- increase in s increase GDP per capita permanently

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