Abstract
The Ramsey-Cass-Koopmans model is an economic model resembling the Solow model. The purpose of this paper is to outline the model with government, and assess the effects of government spending being tax or bond financed. We will see a result stating that it does not matter whether government spending is tax or bond financed. The Ramsey model is a micro-founded model – where the dynamics of economic aggregates are determined by decisions at a microeconomic level. The growth rates of population and technology are constant, and capital stock evolves through the interaction between households and firms in a competitive market. Savings rate therefore, is no longer exogenous and does not have to be constant. Before outlining the model however, the assumptions used need to be outlined for both firms and households.
Firstly, we assume there are a large number of identical firms, all trying to maximize profit. Each firm has access to the production function Y = F(K, AL), where K is capital and AL is effective labor. The firms operate in a competitive factor market, i.e. they hire workers and rent capital in a perfectly competitive market, and sell output in a perfectly competitive market. Technology (A) is given, and this grows at rate g. Also, because the firms are owned by households, any profits a firm gains are accrued in a household.
