TEST

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EJERCICIOS LARGOS

1. MAYO 2019 EQUIVALENCIA RICARDIANA

2. MAYO 2013 IMPUESTOS EN CRÉDITO
3. MAYO 2018
 4. IMPUESTOS GENÉRICO

MAYO 19. PENSIONES

 5. PENSIONES.
Section EXAMEN GENÉRICO INGLÉS
4. Pensions

(25 points) This question is about pensions and is based on the overlapping-
generations model we have seen in class. Each generation lives for two periods (young
and old); we are studying the competitive equilibrium with rational expectations.

1. (5p) The problem of a household born in period t is

max ln(cy,t ) + ln(co,t+1 )

cy,t ,co,t+1 ,st+1

s.t. cy,t + st+1 = (1 ⌧t )wt ,

co,t+1 = et+1 + st+1 rt+1 ,

where 0 <  1 is the discount factor. When young, the household earns
a gross wage wt that is taxed at rate ⌧t . When young the household con-
sumes cy,t , and when old it consumes co,t+1 . The household saves st+1 when
young, and receives a (gross) interest rate rt+1 on these savings.1 A pension
of et+1 is also received when old. Write the Lagrangian problem of the house-
hold (1p), calculate first-order conditions of the household (2p), and show that
they imply that the optimal savings choice is given by (2p)

et+1
s⇤t+1 = wt (1 ⌧t ) .
1+ (1 + )rt+1

1
Capital depreciates fully after it is rented out to be used in production.

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2. (2p) There is a representative firm with Cobb-Douglas production function
Yt = Kt↵ L1t ↵ , where Yt is output of the consumption good, Lt is labor, Kt
is capital and ↵ 2 (0, 1) is a parameter. The firm employs labor at wage wt
and hires capital at interest rate rt . Capital depreciates fully after using it in
production. Write the firm’s cost-minimization problem.

3. (6p) Give the definition of a competitive equilibrium with rational expectations

for this model. The few parts of the model not described in the previous
parts of the question are already given for you, you must fill in the rest of the
definition (ie. fill in the parts which currently have “...”).
Definition: Given parameters {Nt }1
t=0 , k1 , , A, ↵ ...
...
...
... such that:

• ...
• ...
• The government’s budget is balanced for all t 1:

Nt wt⇤ ⌧t = Nt 1 et .

• ...

5. (4p) If Spain were to switch from a pay-as-you-go (PAYG) pension system to

4. a(3p) In class, it was
fully-capitalized shownwould
system that the
theevolution of capital
steady-state capitalper capita
stock, k̄, kincrease
t = Kt /N
ort
in equilibrium (the law of motion) is given by
decrease (2p)? Say how we can we see this result using the formula you derived
in the previous part of this question
↵(1 and
↵) (1give ⌧a )brief economic intuition (2p,
⇥
kt+1 3=sentences in total).
write no more than ⇤t Akt↵ .
↵(1 + ) + (1 ↵)⌧t+1 (1 + nt+1 )

Assume that the tax rate and population growth rate are constant (⌧t = ⌧ ,
nt = n for all t). From the above equation, find a formula for the steady-state
capital stock.

5. (4p) If Spain were to switch from a pay-as-you-go (PAYG) pension system to

a fully-capitalized system would the steady-state capital stock, k̄, increase or
decrease (2p)? Say how we can we see this result using the formula you derived
in the previous part of this question and give a brief economic intuition (2p,
write no more than 3 sentences in total).

6. (5p) Describe the fallacy of a fixed quantity of labor (2p). If it were true, would
11 correlation between the retirement age
it predict a positive, zero, or negative
and the youth unemployment rate (2p)? What kind of correlation is there
between the retirement age and the youth unemployment rate in the data
across countries (1p)? (Write only one sentence each question.)

6. (5p) Describe the fallacy of a fixed quantity of labor (2p). If it were true, would
it predict a positive, zero, or negative correlation between the retirement age
 Explain your answer.
where 0 <  1 is the discount factor. When young, the household earns a
gross wage wt and pays the lump-um tax ⌧t . When young the household con-
sumes cy,t , and when old it consumes co,t+1 . The household saves st+1 when
young, and receives a (gross) interest rate rt+1 on these savings (capital depre-
ciates fully
6. PENSIONES after15.
it isEJERCICIO
rented outCONto beCAPITALIZACIÓN.
used in production). A pension of et+1 is
Section 3. JUNIO
Pensions
also received when old. Write the Lagrangian problem of the household (1p),
calculate first-order conditions of the household (2p), and show that they imply
that theThis
(26p) optimal savings
question choice
is about is givenand
pensions by is(1p)
based on the overlapping-generations
model we have seen in class. Each generation lives efor two periods (young and old);
t+1
s⇤t+1 = equilibrium
we are studying the competitive (wt ⌧ )with rational expectations.
. The number
1+ (1 + )rt+1
of individuals born each period is denoted by the sequence {Nt }1 t=0 and nt denotes
the population growth rate at t (that is, (1 + nt ) = Nt /Nt 1 for all t.

1. (4p) The problem of a household born in period t is

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max ln(cy,t ) + ln(co,t+1 )
cy,t ,co,t+1 ,st+1

s.t. cy,t + st+1 = wt ⌧,

co,t+1 = et+1 + st+1 rt+1 ,

where 0 <  1 is the discount factor. When young, the household earns a
gross wage wt and pays the lump-um tax ⌧t . When young the household con-
sumes cy,t , and when old it consumes co,t+1 . The household saves st+1 when
young, and receives a (gross) interest rate rt+1 on these savings (capital depre-
ciates fully after it is rented out to be used in production). A pension of et+1 is
also received when old. Write the Lagrangian problem of the household (1p),
calculate first-order conditions of the household (2p), and show that they imply
that the optimal savings choice is given by (1p)

et+1
s⇤t+1 = (wt ⌧) .
1+ (1 + )rt+1

2. (2p) There is a representative firm with Cobb-Douglas production function

Yt = Kt↵ L1t ↵ , where Yt is output of the consumption good, Lt is labor, Kt
is capital and ↵ 2 (0, 1) is a parameter. The firm employs labor at wage wt
and hires capital at interest rate rt . Capital depreciates fully after using it in
production. Write the firm’s cost-minimization problem.
3. (3p) The government administers a fully funded social security system. In
particular, the contributions to social security are invested in the capital market
at the interest rate rt+1 . In the next period, the contributions and the interest
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payments generated are distributed among the retired population as a pension
payment. Write down the budget constraint of the government in period t + 1.

4. (6p) Define competitive equilibrium with rational expectations for this model.
Some features not described are provided and you have to fill the blanks “...”.
Definition: Given the parameters {Nt }1 t=0 , k1 , , A, ↵ ...
2. (2p) There is a representative firm with Cobb-Douglas production function
...
1 ↵
... Yt = Kt↵ Lt , where Yt is output of the consumption good, Lt is labor, Kt
... is capital and ↵ 2 (0, 1) is a parameter. The firm employssuch labor at wage wt
that:
and hires capital at interest rate rt . Capital depreciates fully after using it in
...
•production. Write the firm’s cost-minimization problem.
• ...
• ...
• The capital market... 8
• ...
4. (6p) Define competitive equilibrium with rational expectations for this model.
Some features not described are provided and you have to fill the blanks “...”.
Definition: Given the parameters {Nt }1
t=0 , k1 , , A, ↵ ...
...
...
... such that:

• ...
• ...
• ...
• The capital market...
• ...

5. (3p) Show that equilibrium capital per worker kt = Kt /Nt is given by

(1 ↵)
kt+1 = Ak ↵ .
(1 + )(1 + nt+1 ) t

6. (2p) Assume that population growth is constant (nt = n for all t), find out an
expression for the stock of capital per worker at the steady state equilibrium
as a function of parameters only.

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7. (2p) Why the pension system does not affect capital accumulation in equilib-
rium? Answer in 1 sentence.

8. (4p) Assume that the economy is at a steady state equilibrium and the gov-
ernment decides by surprise to reform social security to finance pensions in
a pay-as-you-go way. In period t0 , the old generation receives the pension
e0 = r̄⌧ + ⌧ ⇤ (1 + n) where r̄ is the steady state interest rate, and the young
generation pays the tax ⌧ . In the following periods, pension is equal to (1+n)⌧ .
What effect will have this reform on the stock of capital per worker in period
t0 + 1. (2p)? Explain your answer.

Find a condition under which the young generation benefits from this reform.
Hint: Find out how the present value income (w ⌧ + e/r) changes due to the
fact that e will change with the reform (2p)

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