Assignment

Difference equation
1) Solve the difference equation

a) 𝑥𝑖 = 4𝑥𝑖−1 + 2 (𝟒𝒊 (𝒙𝟎 + 𝟏) − 𝟏)

b) 𝑥𝑖 = −5𝑥𝑖−1 + 7 (−𝟓𝒊 (𝒙𝟎 − 𝟕/𝟔) + 𝟕/𝟔)

2) Solve the difference equation

𝑥𝑡 + 5𝑥𝑡−1 +10=0 and 𝑥0 = 20
a) Write down the differential equation? (−𝟓𝒕 (𝟔𝟓/𝟑) − 𝟓/𝟑)
b) Write down the steady state? (-5/3)
c) Comment on the nature of the time path? (divergent)

3) Solve the difference equation :

𝑦𝑡 = −7𝑦𝑡−1 − 16 𝑎𝑛𝑑 𝑦0 = 15
a) Write down the difference equation? (−𝟕𝒕 (𝟏𝟕) − 𝟐)
b) Find out the steady state? (-2)
c) Comment on the nature of the time path? (diverges)

4) Solve the difference equation :

1
𝑦𝑡 − 2 𝑦𝑡−1 = 16 𝑎𝑛𝑑 𝑦0 = 10
a) Write down the difference equation? ((𝟏/𝟐)𝒕 (−𝟐𝟐) + 𝟑𝟐)
b) Find out the steady state? (32)
c) Comment on the nature of the time path? (diverges)

5) 𝑄𝑑 = 18-3𝑃𝑡 , 𝑄𝑆 = −3 + 4𝑃𝑡−1

a) Find the difference equation using equilibrium condition of

𝟒
demand and supply? ( 𝒑𝒕 = − 𝟑 𝒑𝒕−𝟏 + 𝟕)
b) Find the steady state level of prices? (3)
c) Suppose that the initial price is 𝑝0 = 4. Find the solution of the difference
𝟒
equation? ( 𝒑𝒕 = (− 𝟑)𝒕 + 𝟑)
d) Comment on the nature of the time path? ( oscillates and converges)
6) 𝑄𝑑 = 8-𝑃𝑡 , 𝑄𝑆 = −4 + 8𝑃𝑡−1

a) Using the equilibrium condition, write down the difference equation that
represents the time path of price? ( 𝒑𝒕 = −𝟖𝒑𝒕−𝟏 + 𝟏𝟐)
b) Find the steady state price? (4/3)
c) Suppose that the initial price is 𝑝0 = 4. Illustrate the time path of price. Is the
time path convergent or divergent or oscillatory? (oscillatory)

7) 𝑄𝑑 = 100+0.4𝑃𝑡 , 𝑄𝑆 = 220 − 0.8𝑃𝑡−1 , 𝑃0 = 200

a) Find the difference equation using equilibrium condition of

demand and supply? (𝑷𝒕 = −𝟐𝑷𝒕−𝟏 + 𝟐𝟓𝟎)
b) Find the equilibrium state? (100)
c) Find the solution of the difference equation? (𝑷𝒕 = (−𝟐)𝒕 (𝟏𝟎𝟎) + (𝟏𝟎𝟎)
d) Check whether the time path is convergent or divergent
or oscillatory? (oscillatory)

8) An investor deposits $1000 in an account paying interest at a rate of 7%,

compounded monthly, and also makes additional deposits of $25 per month.
a) Write down the difference equation? (𝒙𝒕 = 𝟏. 𝟎𝟕𝒙𝟎 + 𝟐𝟓)
b) What the total amount in the account after 4 years using the
difference equations? (4 years)

9) A bank account gives an interest rate of 5% compounded monthly. If you invest

$1000,
𝟐𝟒𝟏
a) Write down the difference equation? (𝒒𝒏 = (𝟐𝟒𝟎) 𝒒𝒏−𝟏 )
b) How much money do you have after 10 years? (1283.35)

10)A bank account gives an annual interest rate of 5% compounded monthly. If you
invest $2000 initially and add $20 per month.

a) Write a difference equation which describes how the amount changes from
𝟐𝟏
month to month. (𝒒𝒏 = ( ) 𝒒𝒏−𝟏 + 𝟐𝟎)
𝟐𝟎
𝟐𝟏 𝒏
b) Solve the difference equation. (𝒒𝒏 = (𝟐𝟎) (𝟐𝟒𝟎𝟎) + 𝟒𝟎𝟎
 c) Comments on the time path that it is convergent or divergent
or oscillatory? (Divergent)

11)The population of a country is currently 1,00,000. However, it is declining at a rate

of 1% per annum. However there net immigration of 10,000 persons each year.
a) Write the difference equation for the population after
𝟗𝟗
t years. ( 𝒑𝒕 = (𝟏𝟎𝟎) 𝒑𝒕−𝟏 + 𝟏𝟎, 𝟎𝟎𝟎)
b) Write the solution of it. ( 𝒑𝒕 = 𝟎. 𝟗𝟗𝒕 (𝟗, 𝟎𝟎, 𝟎𝟎𝟎) + 𝟏𝟎, 𝟎𝟎, 𝟎𝟎𝟎)
c) Find the steady state level. (10,00,000)
d) Does the solution converges/ diverges away from the
equilibrium state? (Diverges)

12)Consider the difference equation

𝑦𝑡+1 (𝑎 + 𝑏𝑦𝑡 ) = 𝑐𝑦𝑡 (t = 0, 1, 2,….)

Where we assume that a, b, c are positive constants, and 𝑦0 > 0.

a) Show that 𝑦𝑡 > 0 for all t=0, 1, …

b) Define a new function 𝑥𝑡 by 𝑥𝑡 =1/ 𝑦𝑡 . Show that by using this substitution, the
1 𝑡+1 3
new difference equation is as 𝑦𝑡 = [(2) + 2]−1?

13) Suppose that at time t = 0, you borrow $100,000 at the fixed interest rate r = 0.07
per year. You are supposed to repay the loan in 30 equal repayments so that after
T = 30 years, the mortgage is paid off.
a) How much is the yearly repayment? (8058.64)
b) How much is the interest payment and principal amount in the first and last year
respectively? (interest payment = 7000, principal payment = 1058.64)

14) A loan of amount $L is taken out on January 1 of year 0. Installment payments for
the principal and the interest are made annually, commencing on 1st January of
year 1. Let the interest be 𝑟 < 2, so that the interest amounts to rL for the first
payment. The contract states that the principal share of the repayment will be half
the size of the interest share.
a) Show that the debt after January 1 of year n is (1 − 𝑟/2)𝑛 𝐿.
b) Find r when it is known that exactly half the original loan is paid
after 10 years. (13.39%)
 c) What will be the remaining payments be each year if the contract is not
changed? (The loan will never be repaid)

15) Let 𝑌𝑡 denote national income, 𝐼𝑡 is the total investment and saving 𝑆𝑡 all in period t.
suppose that saving is proportional to national income, and investment is
proportional to change in income. Then for t=1,2

𝑆𝑡 = 𝛼𝑦𝑡

𝐼𝑡 = 𝛽(𝑦𝑡 − 𝑦𝑡−1 )
𝑆𝑡 = 𝐼𝑡

Assume that 𝛽 > 𝛼 > 0. Deduce the difference equation determining the path of
𝜷
𝑦𝑡 given 𝑦0 ? (difference equation=𝒚𝒕 = (𝜷−𝜶)𝒕 𝒚𝟎)