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Unformatted text preview: Jay H. Hong Oct 27, 2008 ECO 475, Fall 2008, Midterm Exam This exam has 3 questions, for a total of 100 points. You have 3 hours. Manage your time wisely. Feel free to make an appropriate assumption if needed. Good luck!! 1. Small Open Economy (30 points) Consider a growth model economy with a representative agent. The agent has access to two types of assets: First asset is physical capital k , which is used in the production technology y t = k t . At the same time, she can also use her resources to buy bonds from abroad that return R units of consumption good next period, where R > 1 is timeinvariant and R = 1. Capital depreciates at a rate of . The representative agent maximizes X t =0 t ln( c t ) subject to her budget constraint, k t 0, b t 0, b and k > 0 given. (a) (7 points) Formulate the agents problem recursively. What are the state variables and control variables? (b) (8 points) State any additional assumptions you may need to guarantee the existence of the (nondegenerating) steady state. Comment on whether the steady state is unique or not. Find the optimality conditions and characterize the steady state....
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 Fall '07
 Hong

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