Mock Exam (macro) Flashcards
(37 cards)
Wat is the Ramsey Cass Koopmans model
The Ramsey-Cass-Koopmans model is a neoclassical model of
economic growth that focuses on optimizing consumption and
savings decisions over time
What are the main components of the Ramsey Cass Koopmans model
.MicroFoundations
.Endogenous Savings Rates
. Pareto Efficiency
. Continuous Time
explain micrcofoundations
The model explicitly considers the optimization
behaviour of households, who choose consumption and savings to
maximize utility over time.
explain endogenous saving rate
Unlike the Solow-Swan model, the
savings rate is not constant and is determined by the optimization
behaviour of households.
Pareto efficiency
The model achieves Pareto optimal outcomes,
meaning that resources are allocated in a way that no one can be
made better off without making someone else worse off.
Continuous time
The model is typically formulated in continuous
time, allowing for a more detailed analysis of dynamic
(consumption/savings) behaviour
General Characteristics and Comparison to Solow Swan Model
.The Ramsey model is a model of optimal growth for a closed
(neo-classical economy) populated by a representative consumer2.
. While the Solow model assumes a fixed savings rate, in the
Ramsey model the savings behaviour comes from the
intertemporal optimisation by consumers.
. Strictly speaking, the Ramsey model is a normative model - that
is, the model tells us what the optimal growth path is, and how it
is derived.
. However, it can be interpreted as a positive model of how the
economy actually evolves. This is a topic of some (unsettled)
debate in macroeconomics.
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Utility Function
Describes the agentβs preferences:
π = β«β0 π’(ππ‘)ππ₯πβππ‘ππ‘
. Typically a function of consumption, often assumed to be logarithmic
or power utility to reflect diminishing marginal utility.
Production FunciΓ³n
.Describes how output is produced from capital and labour.
.Often assumed to be Cobb-Douglas, which implies constant returns to
scale and a specific form of factor substitutability.
capital accumulation equation
Shows how capital evolves over time: πk
ππ‘ = π(Kπ‘) β NKπ‘ β Cπ‘
o Depends on savings (investment) and depreciation, highlighting the
trade-off between current consumption and future production
capacity.
Intertemporal Budget Constraint
.Ensures that the agentβs consumption and savings decisions are
feasible over time: β« πβππ‘β π(π‘)ππ‘ = β«πβππ‘β(w(t) + r(t)k(t))dt
. Reflects the need for the agent to plan consumption and savings in a
way that avoids running out of resources.
Optimallity conditions
Derived from the agentβs maximization problem:
βͺ π» = π’(ππ‘)ππ₯πππ‘ + ππ‘[π(ππ‘) β πππ‘ β ππ‘]
. Include the Euler equation, which relates consumption growth to the
interest rate, ensuring that the agentβs consumption path is optimal
given their preferences and constraints.
βͺ π (π‘)Μ
π(π‘) = 1
π (π(π‘) β π)
Provide and explain appropriate diagram
SEE photos for diagram
The phase diagram above traces the curves along which
ππ
ππ‘ = 0 [π£πππ‘ππππ ππππ] πππ ππ
ππ‘ = 0 [π‘βπ β²βπππβ² ππππ]
The point at which they intersect is known as the Optimal Steady State. This
is where all the values of the variables of interest (per capita consumption
(c) and per capita capital stock (k), remain constant over time.
Hence the diagram shows the optimal growth path (the line with arrows running
from quadrant B to quadrant D).
The arrows on this line point to ck, the values of c and k that is
represented by : c=f(k)-nk and k =fβ(k)=n + Ο where, for k*, a
condition is known as the βmodified golden ruleβ
How search and matching theory is utilized in the DMP mode
. Job Creation and Destruction
. Matching Function
. Wage Determination
. Unemployment Dynamics
. Vacancy Posting Costs
. Equilibrium Unemployment
Job creation and destruction
The DMP model explains how firms create and
destroy jobs based on economic conditions. Firms post vacancies when the
expected profit from filling a job exceeds the cost of posting the
vacancy.
Matching Function
The model uses a matching function to describe how
unemployed workers and job vacancies come together. This function
typically depends on the number of unemployed workers and the number of
vacancies, capturing the efficiency of the matching process
wage determination
Wages in the DMP model are determined through a Nash
bargaining process between workers and firms. The outcome depends on the
workerβs bargaining power and the surplus generated by the match.
unemployment dynamics
The model captures the dynamics of unemployment by
considering the flows into and out of unemployment. This includes job
separations (firings and quits) and job findings (matches between workers
and vacancies).
Vacancy posting costs
Firms incur costs when posting vacancies, which
influences their decision to create jobs. These costs can include
advertising expenses and the time spent by HR personnel.
Equilibrium unemployment
The model predicts an equilibrium level of
unemployment where the number of job seekers equals the number of job
vacancies. This equilibrium is influenced by factors such as the
efficiency of the matching process and the costs of posting vacancies.
What are the assumptions of the search and match theory
Heterogeneous Agents
search frictions
matching function
bargaining
Heterogeneous Agents
Workers and firms have different
characteristics, leading to varied job matches.
search friction
It takes time and effort for workers to find jobs
and for firms to find suitable employees, reflecting real-world job
search processes.
matching function
Describes how workers and firms are paired, often
assumed to be a function of the number of job seekers and vacancies.
