Lecture 4 Exercise

As can be seen below, the value of the capital output ratio, u, has a slight fall then gradually improves slightly over time. However, when the interest rate on bonds is changed from 0.07 to 0.1, the capital output ratio improves a much higher steady state value.




There is a similar occurence with the value of households improving again as it moves towards a steady state value. This can also be seen below.





Now, if we were to change the value of alpha to 0.7 from 0.3, we can see that there is a negative effect on both the capital output ratio and the value of households.

For the value of u, there is a slight sudden increase however it gradually returns to its original value which is slightly less than if this change was not made, as can be seen graphically below.



For the value of households though, the reaction is that the value diminishes quite rapidly to zero which is not desirable in any case.