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What are limitations to the Solow model?

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

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What are the assumptions in the Solow model?

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• constant returns to scale in K & L
• f(k) is concave - bow-shaped in the argument k
• effective labour is AL
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What is the definition of a balanced growth path?

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

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What is the steady state in Solow?

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

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What are the parameters in the optimisation problem in Solow?

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1. Investment
2. Consumption
3. Saving
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What is the Golden rule? (Solow)

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

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What are the key characteristics of the Ramsey model?

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• 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
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What are the key characteristics in the OLG model?

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• 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
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How does capital accumulation work in the Ramsey model?

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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)
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What is the Keynes-Ramsey Rule?

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• 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

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What are the dynamics in Ramsey?

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• 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
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What is included in the savings rate?

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• 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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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:
1. Investment
2. Consumption
3. 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

### Erstelle und finde Lernmaterialien auf StudySmarter.

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