Why do you have a in the term?
Hi everyone, I was hoping someone could help with the question attached.
I'm having an issue creating an equation independent of t-1, my answer is completely different to the one in the back of the book.
the formula pt is of the form yt=ayt-1 + b
so the time independent term b/(1-a) is k(3-2pt-1)/1-(1+r)
I then put this value into the formula for the solution of a first order linear recurrence equation.
But the answer in the book is something totally different.
Ah! so I have multiply the whole expression out. I did that and got the answer in the back.
Just one more question, and this seems to be causing a lot of issues for me. For the expression to tend to a limiting value doesn't a<1 have to be the case since if a>1 the price will tend to infinity as t does? If a is 1+2k-r which is <1, my inequality sign is the wrong way. Could you explain what I'm doing wrong!? :S