Practice question · Multiple choice
In the Ramsey growth model, the steady state is a saddle point. Why is this economically important?
Hints
- A saddle admits exactly one converging trajectory.
- That uniqueness is what makes the equilibrium determinate.
Show the answer
C. Exactly one trajectory reaches equilibrium: the saddle path
Why
The saddle-path property is the foundation of determinate equilibrium in rational-expectations models. Forward-looking agents pick the unique convergent path, otherwise the economy explodes.
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