ECOM001 Macroeconomics A 2024/25
Problem Set 6
Homework questions: 2, 4, 5, 6, 8.
1. Write down a two-period version of the household’s problem in the RBC model, taking into
account the uncertainty about wages. Find the solution of this problem and show it gives
conditions that justify those for the infinite-horizon problem.
2. Derive the household’s optimality conditions (page 17, section 3, lecture notes Topic 6) from
the conditions obtained from the Lagrangian to the infinite-horizon problem (sec 2, Topic 6).
3. (Problem 5.14, Romer p. 236) Derive the dynamics of output in the RBC model with 100%
depreciation.
4. (Problem 5.8, Romer p. 234) A simplified RBC model with additive P1 shocks and quadratic
utility. Consider a constant population. The individual maximises t=0 u(Ct )/(1 + ⇢)t , with
u(C) = C ✓C 2 as long as u0 (C) > 0. Output is Yt = AKt + et , where et = et 1 + ✏t with
✏t an iid zero-mean disturbance, and 2 ( 1, 1). Zero depreciation so Kt+1 = Kt + Yt Ct .
Assume A = ⇢. (a) Find the Euler equation; (b) Guess the form Ct = ↵ + Kt + et . What is
Kt+1 as a function of Kt and et ?; (c) What are the parameters for which the Euler equation
is valid for all Kt and et ?; (d) Describe the e↵ects of a one-time productivity shock.
e 5. Explain why the RBC model with less than full depreciation can do better than the model
with full depreciation in accounting for observed fluctuations.
6. Explain why government spending shocks in the RBC model help account for business cycles
facts.
7. Explain why indivisible labour in the RBC model helps account for business cycles facts.
8. (Calibration) Consider the following long-term data for the U.S. economy:
• Quarterly interest rate 0.065/4.
• Labor share in national income (NIPA) 2/3.
• Average growth of output 0.016/4.
• Fraction of worked time on available (non-sleeping) time 0.2.
• Investment-output ratio 0.118.
• Capital-output ratio 4.0.
Use them to calibrate the RBC model’s parameters: b, ⇢, ↵, , g. Use the following functional
forms:
F (k, h) = k ↵ (Al)1 ↵
u(c, 1 l) = ln c + b ln(1 l)
9. Explain the impulse-response of output, labour, supply, consumption, capital, and wages
and and interest rate to a productivity shock in a typical calibrated RBC model. Discuss,
specifically, the role of intertemporal substitution.
10. Discuss merits and weaknesses of the RBC model.
1
Problem 2
First we should define Lagrangian function
L ePtlct.li
EÉtlNttXtlwtlttCltrtlk
enktti G
Ct
And compute the partial dertivation.Ct.lt and
kttl
孔 UCCt 1 It
Nt t 0
yct Ct
so we get that
Ui Ct 1 It Nt t 1
and compute the It
UI Ce 1 It1 Nt
寻 t Wt 0
i UI Ct 1 It Nt eWt
go next kttl
验 tenkttli.ee
kttl
that
go to the next period.weget
PCt
ttllltrttilk.tt e t
2kt
EP't et ltrtt
i ten EPEt tti Hrt 1 3
叕t Wt Itt Hrt kt Ct ehktti
go linoePtltktt.IO 5
Problem 4
It's be given that
MAX E 昆
ulctlltlpgt S.tk
Ct
tti
Kttyt
Yt Akttet for all t 0.1.2
et lt it Et
a
jǎ 市 Et 垫dGt CHA I
which A means
MPK UCk.ee
Hp EINCkie'II
u C
MKAX
S.t c kt Akte k
e et E
2Uǎ lip EUk K'e 0
1
Vklk e HA 多
些
多 9 Hh EI CHAI
炎 I
i
Ct Et Ctl
b Ct α
βkttre computektt KttiEKttAKttet
latBkttre.tl
HA β kt at Ctrl et
cc Let'sguess Euler equation
Ct α βKttret
So Cttl α
βKttitrlttl
α 1 β7
βCHA β Kttβ 1 r et trl ett
Et11
and consider the result a
Ct Et Ctt1
α βkttret 2 1 β1 βCHA Ke β 1 5 tr Iet t
r Et Et 1
α α11
so β a 0
β β It A β
2 β rrltr
AnA
d Ct α βKttret
and Ct A kt t
t et from cc
kt 1 Ktt 年
A et
Yt AKt t et et et it Et
计 1
so Kt will be constant
and Yt monotone increasing
Ct also constant
计 cl.it can be shown that
e
Yt
and Ye
Ct
t
f
t
So
if shock to G the land ywuincreas if G
grow but w will decrease
订 shock to A the l will totally equal to
zero but output and w will increase
5
To illustrate how a lower depreciation rate improves
the t of the model, we can consider the extreme
case of no depreciation and no growth, i.e. zero
investment in the absence of shocks. In this case, a
positive technology shock makes it optimal for
households to undertake some investment by raising
the marginal product of capital in the next period. A
temporarily high saving rate implies that expected
consumption growth will be higher than in the case of
a constant saving rate, which in terms of the
consumer's intertemporal optimisation condition
(5.23) requires a higher expected interest rate.
However, we know that higher interest rates increase
the current supply of labour, so that the introduction
of incomplete devaluation leads to a greater
responsiveness of investment and employment to
shocks.
6
It breaks the strong link between output and real
wages. Since an increase in government purchases
increases the lifetime tax burden on households, it
reduces their lifetime wealth. If labour supply
increases without a change in technology, real wages
fall, so output and real wages move in opposite
directions. It follows that with shocks to both
government purchases and technology, the model
can produce a pattern of aggregate real wage
movements that is not strongly cyclical.
Problem 8
From the question we
get
So a 专
号 4
and Y AK Ltα
步 式式 卡
and we can easily get 1 averagegrowth of
g
output so g 1.004
and we use the intertemopralF.co C.f the
household in steady state
Pl Hr
gei
r is given by 0.065 4 has been compute before
g
So ln0.988
p
Next we consider the economy's feasibility constraint
in steady state
j ten 1 8 1号
吂 e H8
f 0.0255
we use the steady state version
Finally of optimality
condition for the leisure consumption choice toget
吐 i.gl1 a
I E 0.2 0.3I
if we pick 0.2
for
we can get b 3
