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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 time-invariant 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 (non-degenerating) 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