Volker Hahn, Fuzhen Wang University of Konstanz

Advanced Macroeconomics I, WT 2013/14

Exam
Date: February 6, 2014, 3:15 - 4:45 p.m., R712

You may answer in English only.

The duration of the exam is 90 minutes.
Please use only the designated white sheets for your answers.
You must not use any books, notes, etc.
If you use mathematical formulae, define the respective vari-
ables (unless the variables have been defined in the question).
Problem #1:
Various issues (20 points)
(a) Explain the terms state variable and no-Ponzi condition
briefly. (2 points)
(b) Suppose that the production function is of the Cobb-Douglas
form F (AL, K) = (AL)1 K , where all variables have their
usual meanings. Compute the share of output that accrues to
labor in a competitive equilibrium. Why is this finding useful
for the calibration of macroeconomic models? (2 points)
(c) Log-linearize the resource constraint

Kt+1 = Kt (1 ) + Kt (At Lt )1 Gt Ct
C,
around the steady-state levels K, G and A.
Gt is govern-
ment spending in period t, Kt is the aggregate capital stock,
Lt denotes labor, Ct consumption, and At is the efficiency of
labor. (3 points)
(d) In the lecture, we discussed a search model of money and ob-
tained the following set of Bellman equations:
V (g) = (1 M )x2 (U  + V (g))
+M x max {V (m) + (1 )V (g)}
[0,1]

+ 1 (1 M )x2 M x V (g)
 

V (m) = (1 M )x(U  + V (g))

+ (1 (1 M )x) V (m)
Define all variables precisely (3 points). Explain the first of
these equations thoroughly (3 points). How high is aggregate
consumption in the stationary equilibrium where money is ac-
cepted by everyone with certainty? (2 points) How high is it
when money is accepted by no-one? (2 points) Explain why
it never happens in an equilibrium that someone who owns
money trades this money for a good that he cannot consume.
(3 points)

2
Problem #2:
Consider a real business cycle model with full  depreciation.The in-
L1+
stantaneous utility function is U (Ct , Lt ) = ln Ct t , where
1+
Ct denotes consumption and Lt denotes labor in period t. Param-
eter is strictly positive. Future utility is discounted by a fac-
tor with 0 < < 1. The production function is Cobb-Douglas
Yt = Zt Kt L1
t with 0 < < 1, where Zt = ln(Zt ) follows an
iid
AR(1) process: Zt = Zt1 + t . 0 < < 1, t N (0, 2 ) and
 > 0. (16 points in total)
(a) Explain whether Zt satisfies the Markov property. (1 points)
(b) Formulate the sequential problem for the social planner.
(2.5 points)
(c) Write down the Euler equation, the first-order condition with
respect to labor and the transversality condition for the social
planners problem. (3 points)
(d) Now we turn to the recursive competitive equilibrium. Write
down the Euler equation and the first-order condition with re-
spect to labor. Explain these equations intuitively. (4 points)
(e) Show that the Euler equation from the social planners problem
is automatically satisfied in a recursive competitive equilibrium.
(3.5 points)
(f) Which method could be used to solve the social planners prob-
lem numerically if we were interested in large relative deviations
from steady-state values? Explain briefly. (2 points)