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Exercise 17.2
1.
(a) yt+1 = yt + 7
that yt = y0 + 1
. This is equivalent to the earlier answer, because we can
t 1
t
rewrite it as yt = y0 t 1
= y0 t (1 + + 2 + . . . + t1 ).
1
(a) To find yc , try the solution yt = Abt in the homogeneous equation yt+1 + 3yt = 0. The
result is Abt+1 + 3Abt = 0; i.e., b = 3. Hence yc = Abt = A(3)t . To find yp , try the
solution yt = k in the complete equation, to get k + 3k = 4; i.e. k = 1. Hence yp = 1.
The general solution is yt = A(3)t + 1. Setting t = 0 in this solution, we get y0 = A + 1.
The initial condition then gives us A = 3. The definite solution is yt = 3(3)t + 1.
(b) After normalizing the equation to yt+1 ( 12 )yt = 3, we can find yc = Abt = A( 12 )t , and
yp = k = 6. Thus, yt = A( 12 )t + 6. Using the initial condition, we get A = 1. The definite
solution is yt = ( 12 )t + 6.
(c) After rewriting the equation as yt+1 0.2yt = 4, we can find yc = A(0.2)t , and yp = 5.
Thus yt = A(0.2)t + 5. Using the initial condition, this solution can be definitized to
yt = (0.2)t + 5.
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Exercise 17.3
1.
2.
(a)
Nonoscillatory; divergent.
(b)
(c)
Oscillatory; convergent.
(d)
Nonoscillatory; convergent.
(a)
From the expression 3(3)t , we have b = 3 (region VII). Thus the path will oscillate
explosively around yp = 1.
(b)
With b =
1
2
(region III), the path will show a nonoscillatory movement from 7 toward
yp = 6.
(c)
With b = 0.2 (region III again), we have another convergent, nonoscillatory path.
But this time it goes upward from an initial value of 1 toward yp = 5.
3.
(a)
(b)
(c)
a =
1
4,
convergent.
(d)
Exercise 17.4
1. Substitution of the time path (17.120 ) into the demand equation leads to the time path of Qdt ,
which we can simply write as Qt (since Qdt = Qst by the equilibrium condition):
P
Qt = Pt = P0 P
t
Whether Qt converges depends on the term, which determines the convergence of Pt
as well. Thus Pt and Qt must be either both convergent, or both divergent.
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3.
(a)
= 18, = 3, = 3, = 4. Thus P =
21
7
oscillation.
(b)
= 22, = 3, = 2, = 1. Thus P =
24
4
24
12
damped.
(c)
= 19, = 6, = 5, = 6. Thus P =
oscillation.
4.
(a)
The interpretation is that if actual price Pt1 exceeds (falls short of) the expected price
Pt1
, then Pt1
will be revised upward (downward) by a fraction of the discrepancy
Pt1 Pt1
, to form the expected price of the next period, Pt . The adjustment
process is essentially the same as in (16.34), except that, here, time is discrete, and
the variable is price rather than the rate of inflation.
(b)
If = 1, then Pt = Pt1 and the model reduces to the cobweb model (17.10). Thus
the present model includes the cobweb model as a special case.
(c)
Qst +
,
Qs,t1 +
.
But
+ Pt
=
and Pt1
+ Pt1
Substituting these into the adaptive expectations equation, and simplifying and shift-
(d)
( + )
Pt+1 1
Pt =
(+)
.
t
+
+
P0
+
Pt =
1
+
= P0 P 1
+ P
i.e., if
< .
120
is negative,
(e)
If the price path is oscillatory and convergent (region V in Fig. 17.1), we must have
1 < 1
of oscillation, and the first, with the question of convergence. Adding ( 1), and
dividing throught by , we have 1 2 < < 1 1 . Given that the path is oscillatory,
convergence requires 1
range for is 1 < < 0. If 0 < < 1, however, the range will become wider.
5. The dynamizing agent is the lag in the supply function. This introduces Pt1 into the model,
which together with Pt , forms a pattern of change.
Exercise 17.5
1. Because a = ( + ) 1 6= 1, by model specification.
2.
(IV)
(V)
1 ( + ) = 0. Thus =
1
+ .
(VI)
(VII)
1
+ ,
we obtain
2
+
>>
1 ( + ) = 1. Thus =
1
+ .
2
+ .
1
+ ,
we obtain >
2
+ .
4. The dierence equation will become Pt+1 (1 )Pt = ( k), with solution
k
k
Pt = P0
(1 )t +
III
0<b<1
0<<
IV
b=0
1 < b < 0
VI
b = 1
VII
b < 1
>
<<
121
[These results are the same as Table 17.2 with set equal to 0.] To have a positive P , we must
have k < ; that is, the horizontal supply curve must be located below the vertical intercept
of the demand curve.
Exercise 17.6
1. No, yt and yt+1 can take any real values, and are continuous.
2.
3.
(a)
(b)
(c)
(d)
(e)
(a)
Yes.
(b)
(c)
At first ther iwll be steady downward movement to the right, but as it approaches R,
oscillation will develop because of the negative slope of the phase line. Whether the
oscillation will be explosive depends on the steepness of the negatively-sloped segment
of the curve.
(d)
4.
(e)
(a)
The phase line will be downward-sloping at first, but will become horizontal at the
level of Pm on the vertical axis.
(b)
Yes; yes.
(c)
Yes.
P =
k
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or
+
k=
P
It follows that
k=
+
P
123