Ramsey Model

Question 1

Which are some of the assumptions for households in the Ramsey model?

Answer 1

• Households make optimal consumption / savings decisions
• Families own assets / capital and rent it to firms
• Families are owners of labor
• They maximize their utility function subject to a budget constraint

Question 2

Where is income destined to in the Ramsey model?

Answer 2

A household’s total income can be destined towards consumption or the acquisition of more assets

Question 3

What is a particular characteristic of consumption in the Ramsey model?

Answer 3

Consumption is constant in the long run

Question 4

Which are some of the assumptions for firms in the Ramsey model?

Answer 4

• Firms rent labor in exchange for a working wage
• Firms rent capital in exchange for a return
• Firms sell their product in exchange for a price
• Firms are price-takers

Question 5

What can be implied from the consumer Hamiltonian’s first order conditions in the Ramsey model?

Answer 5

The marginal value of consumption must be equal to the marginal value of investment, which means that individuals are indifferent between these

Question 6

Which will be an individual’s stock of assets at the last period of time (infinity)?

Answer 6

0

Question 7

What can be implied from the production function’s first order conditions in the Ramsey model?

Answer 7

The firm’s marginal product is equal to their marginal cost

Question 8

Which are some assumptions for the market equilibrium in the Ramsey model?

Answer 8

• Salaries are paid by firms
• Interest paid by firms is the interest gained by households
• The price for the sole product that firms set is the same that consumers pay
• Net debt is equal to zero

Question 9

How does the market solution for the Ramsey model compare to the Robinson Crusoe solution, and the social planner solution?

Answer 9

The three solutions are identical

Question 10

Which are some assumptions for the social planner in the Ramsey model?

Answer 10

• It will have the same objectives as agents: it will maximize the same utility functions
• It faces a resource constraint
• It takes into account all mechanisms, externalities, and all the available information at the time of decision-making

Question 11

Which are the three steady states in the Ramsey model?

Answer 11

1. The origin: unstable, we can immediately be drawn away from it
2. k**: stable, it is the only one that satisfies all the optimality conditions
3. k*: steady with saddle point, can only reach it from 2 out of the 4 possible regions

Question 12

Which is a particular characteristic of Ramsey model’s stable path?

Answer 12

It cannot be determined

Question 13

Which is the main difference between the growth paths in the Solow and the Ramsey models?

Answer 13

A balanced growth path with a capital stock above the golden rule level is not attainable in the Ramsey model