Practice question · Multiple choice
The Ramsey model's steady state is a saddle point, which sounds like instability. Why do economists treat that as the desirable case?
Hints
- Ask how many paths converge to a saddle, and who gets to choose which path the economy takes.
- Consumption is a jump variable. What does the agent use its freedom to do?
Show the answer
A. Because exactly one path leads to the steady state
Why
The agent chooses initial consumption freely and every choice but one leads to ruin, so saddle-path stability is what makes the optimum unique rather than a menu. It is the standard structure of forward-looking macro models, one predetermined variable, one jump variable, one stable arm.
Practise Systems of Differential Equations
The app has 8 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on Systems of Differential Equations
- In the Ramsey growth model, the steady state is a saddle point. Why is this economically important?
- Which spreadsheet formula iterates a linear system: if xt is in A2 and yt in B2, with dotx = 0.3x - 0.1y and…
- Which systems have a stable equilibrium?
- In a phase diagram, nullclines are curves where one of the two derivatives equals zero.
- Match each phase-diagram concept to its description.