Answer to Question #266157 in Macroeconomics for Kriti

Question

Consider the Ramsey model seen in class. Assume population grows at rate n, and labour-

augmenting technology grows at rate g. Relative risk aversion is constant and equal to

θ.

1. For an initial value of capital per efficiency unit, k(0), use a phase diagram to sketch the different

paths along which the economy may evolve for different levels of c(0) chosen, given the Euler

equation (derived from the household’s optimization problem) and the steady state condition from

Solow.

2. Do these paths also satisfy the household budget constraint and the requirement that capital

cannot be negative? Why or why not?

3. Show that steady state capital (per efficiency unit) in the RCK framework is always lower than the

golden rule level. Provide intuition for this result.

Answer 1

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