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Unformatted text preview: φ units of new capital in the future. A) Set up and show the ±OC for the Lagrangian, B) Does φ < 1 make the steady state level of k ss higher or lower than when φ = 1?, C) Graph the time paths of ln k t and ln c t following a surprise decrease in φ . 5. Take a Ramsey model in which the budget constraint is k t +1 = f ( k t ) + (1-δ ) k t-(1 + τ ) c t , where τ functions like a consumption tax. The economy starts in steady state in period zero. Draw a graph of ln c t for each of the following four cases: • In period 5, there is a surprise increase in τ , and this increase is permanent • In period 5, there is a surprise increase in τ , and this increase will only last until period 10 • In period 0, it is announced that in period 5 there will be a permanent increase in τ • In period 0, it is announced that in period 5 there will be a 50% chance that τ will increase 1...
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This note was uploaded on 11/10/2011 for the course ECON 601 at Cornell.