Edward C. Prescott
||Meaning / Value
||Aggregate capital stock
||Rental price of a worker for a year
||Rental price of a unit of capital for a year
||Total capital rents
A person owns his labor services. Individuals also own capital
and rent it to firms. The initial capital stock is
K0 = 1970
Kt 1/3 [(1.02)t
Capital accumulates according to the following equation.
0.95 Kt + Xt
People prefer more consumption to less and save at the rate s = 0.20.
Nt = (1.01)t N0
Furthermore, the initial population size is
N0 = 1000
A date t allocation for this economy is a vector (ct, kt,
nt) for households and a vector (Ct, Kt,
Nt) for the business sector. Let c0 be the numeraire (so its price is 1.0 by definition). Let
wt be the real wage and rt be the real rental price of capital.
Report only the answers to the questions asked and report these answers
clearly and concisely. Points will be subtracted for superflous reporting and
points added for well presented answers.
- Report a set of functions that determine the aggregate
quantities (Ct , Xt , Yt ) and prices
wt and rt given Kt and Nt .
Calculate these numbers for t = 0,1,...10 (we recommend you use excel).
- Report the time series for this economy's national
income and product accounts for t = 0,1,2,3,4, and 5.
Report the constant growth rate paths of aggregate
(Kt* , Nt* , Ct*, Xt*
, Yt*) and prices (rt*, wt*).
What is K0/K0*?
What is K10/K10*?
In percentage terms, what fraction of the gap between the value of the capital
stock and its constant growth path value has been reduced in 10 years?