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Econ90003 Tutorial2

Questions about macroeconomics

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Thiago Henrique
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15 views

Econ90003 Tutorial2

Questions about macroeconomics

Uploaded by

Thiago Henrique
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ECON90003

Chris Edmond

Macroeconomics
Tutorial #2

1. An exactly-solved Bellman equation. Consider a discrete-time infinite-horizon optimal


growth model where the planner chooses capital stocks kt+1 for t = 0, 1, . . . , T to maximize
1
X
t
log ct , 0< <1 (1)
t=0

subject to the sequence of resource constraints

ct + kt+1  kt↵ , t = 0, 1, . . .

with given initial condition


k0 > 0
Let v(k) denote the value function for this problem. The value function v(k) solves the Bellman
equation h i
v(k) = max log(k ↵ x) + v(x)
x

Verify that the solution for v(k) is

v(k) = A + B log k

where ✓ ◆
1 ↵
A= log(1 ↵ )+ log(↵ )
1 1 ↵
and
↵
B= >0
1 ↵

2. Properties of the policy function. Consider a strictly increasing strictly concave production
function f (k) that satisfies f (0) = 0 and f 0 (0) = +1 and f 0 (1) < 1. Suppose the policy
function kt+1 = g(kt ) has the form g(k) = sf (k) for some s 2 (0, 1).

(a) Show that there is exactly one steady state k ⇤ > 0.


(b) Show that for any k0 > 0 the sequence {kt+1 }1
t=0 induced by g(k) converges monotonically
⇤
to k .

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