Growth and Investment Econ 4350
Exercises for Seminar 5, Friday March 9
Exercise I.
1) With point of departure in the Ramsey-Cass-Koopman's growth model analyze the effect of the
following parameters on the Steady State consumption per "effective labor" and production per
"effective labor":
a) The rate of time preference
b) The intertemporal elasticity of substitution
c) The population growth
d) The depreciation rate
2) Discuss the effect on long run consumptions levels per capita and the saving rate of the same
parameters i.e. a) to b)
3) How is the transition path to steady state affected by changes in:
a) Increases in the rate of time preference
b) Decreases in the intertemporal elasticity of substitution
Exercise II.
Problem 2.1 and 2.2, page 139, in Barro and Sala-i-Martin
Exercise III.
The Stern Review of the Economics of Climate Change has been criticized for choosing a discount
rate that would lead to "too high levels of saving" i.e. saving levels that are far above what we observe.
They use (in one example) the following felicity function: u(c)=lnc. And they use a rate of time
preference equal to 0.1%. Use the Cobb-Douglas production function, and find the Steady State value
of the saving rate. What do you think about the Stern critique?
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