ADVANCED MACROECONOMICS

SPRING 2020
INSTRUCTOR: BIBASWAN CHATTERJEE
ASSIGNMENT 3

DEADLINE: MARCH 26, 2020, 1 pm (Beijing Time)

INSTRUCTIONS
1. All students must answer all questions unless otherwise indicated.
2. You may study together, but each student must solve and submit their own
assignment.
3. Submission deadlines are inflexible.
4. Failure to upload/submit the assignment close to the deadline due to
connectivity issues do not constitute an unexpected circumstance. Students
are advised to work on and submit assignments ahead of time.
5. Assignments should be submitted on ispace. If you have an emergency, you
may submit by emailing me or the TA.

Total points: 25 (for PhD students) ; 20 (for Masters students)

1. Consider the Ramsey model as studied in class. The time discount
parameter is 𝜌, which measures impatience. In per capita terms,
assets are denoted by 𝑎(𝑡) and the return to one unit of asset is
𝑟(𝑡). Household uses per capita utility times L(t), i.e. 𝑢(𝑐)𝐿(𝑡) to
optimize. 𝐿(𝑡) grows at constant positive rate 𝑛. Assume that,
𝑢(𝑐) = (𝑐1−𝜃 − 1)/(1 − 𝜃), 𝜃 > 0
Imagine that the government deducts a fraction 𝜏 of the asset
income of the representative consumer, in the form of tax.

Answer the following questions.

a. Statement: “Higher taxes on asset income will reduce the

growth rate of consumption per capita.” Assume that 𝑟(𝑡) is
independent of 𝜏. In brief, evaluate if this statement is true or
false. You must use both mathematics and economic intuitive
reasoning in your answer.

b. Suppose now that 𝑟(𝑡) is increasing in 𝜏. Explain in brief if

the statement in Question 1(a) is true or false. You must use both
mathematics and economic intuitive reasoning in your answer.

[5 + 5 = 10 points]

2. Consider the Ramsey model as studied in class. The time discount

parameter is 𝜌, which measures impatience. In per capita terms,
assets are denoted by 𝑎(𝑡) and the return to one unit of asset is
𝑟(𝑡). Household uses per capita utility times L(t), i.e. 𝑢(𝑐)𝐿(𝑡) to
optimize. 𝐿(𝑡) grows at constant positive rate 𝑛. Assume that,
𝑢(𝑐) = log(𝑐 (𝑡))
Answer the following questions.
 a. Statement: “The Keynes-Ramsey condition is independent of
the elasticity of intertemporal substitution”. Derive and
evaluate if this statement is true or false.
[5 points]
3. Consider the Ramsey model as studied in class. The time discount
parameter is 𝜌, which measures impatience. In per capita terms,
assets are denoted by 𝑎(𝑡) and the return to one unit of asset is
𝑟(𝑡). Household uses per capita utility times L(t), i.e. 𝑢(𝑐)𝐿(𝑡) to
optimize. 𝐿(𝑡) grows at constant positive rate 𝑛. Do not assume
any explicit functional form for the utility function.

a. Set up the current value Hamiltonian. Use the current value

co-state variable.

b. Derive the first order condition for consumption, the co-state

equation and the Keynes-Ramsey condition, using the current
value Hamiltonian and the current value co-state variable.

You must show all your steps clearly.

[1 + 4 points = 5 points]

4. This question is only for PhD students. Only PhD students’

answers will be graded.

Consider the proof of the maximum principle as discussed in class.

Derive equation 4(g) using the definition of 𝑦[𝑡, 𝑎], equation 4(d)
and equation 4(f). You must clearly show how you get each term
of 4(g).

[5 points]