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Pset7_F2011

# Pset7_F2011 - UNIVERSITY OF CALIFORNIA DEPARTMENT OF...

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UNIVERSITY OF CALIFORNIA Economics 202A DEPARTMENT OF ECONOMICS Fall 2011 M. Obstfeld/D. Romer Problem Set 7 Due in lecture, Tuesday, November 22, 2011 1. S addle-path of the q-theory model. (Special ground rules for this problem: (1) You must try it first under exam conditions – no readings, no notes, no help. (2) You may then look at lecture notes and readings, but not consult with others or look at the midterm solutions. (3) You may then look at the midterm solutions and/or consult with others.) Consider the 2 equations of the q-theory model, a. Define the steady state of the model, ( Show that the model’s linear (Taylor) approximation in the neighborhood of the steady state takes the form: [ ] ′ ≈ G ′, where G = Be sure to show how A, B, and C depend on exogenous parameters, the steady-state values of q and K, and/or the properties of π( ·) and f(·). b. Show that the characteristic roots of the preceding 2x2 matrix are: where λ 1 > 0 and λ 2 < 0. Please indicate why the second condition holds.

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