# Linear First Order Difference Equations (Iterative/General Method)

1. Mar 21, 2010

### rabbitchannel

1. The problem statement, all variables and given/known data
I am almost done with a chapter all about this topic and this type of question is the only one I can't get. This is linear first order difference equations. The question is:

Given the unemployment Ut equation:

Ut = $$\alpha$$ + $$\beta$$ Ut-1
$$\alpha$$, $$\beta$$ > 0

b. Suppose that there are occasional shocks to the demand for labor causing shifts in Ut. The modified equation for Ut becomes:

Ut = $$\alpha$$ + $$\beta$$ Ut-1 + et

where et varies over time. Show that the solution to the modified equation is:

Ut = $$\beta$$tU0 + $$\frac{\alpha(1-\betat)}{1-\beta}$$ + e1$$\beta$$t-1 + e2$$\beta$$t-2 + ... + et-1$$\beta$$ + et

Don't know how to fix that there. It should be (1-$$\beta$$t)

2. Relevant equations

General Method:
Pc + Pp = General method

Yt = (Y0 - $$\frac{c}{1+a}$$)(-a)t + $$\frac{c}{1+a}$$

I've also got the derived formula for supply and demand but that requires two functions.

3. The attempt at a solution
Ok, I can't get the iteration. This is what I've tried:

Ut = $$\alpha$$ + $$\beta$$Ut-1 + et

Ut+1 = $$\alpha$$ + $$\beta$$Ut + et+1

After this point I don't know what to do. I tried to do this:

Ut+1 = $$\beta$$($$\alpha$$ + $$\beta$$Ut + et+1) + $$\alpha$$ + et+1

Basically multiplying the whole equation by $$\beta$$ then adding: $$\alpha$$ + et+1. Once I do it for 3 periods I can determine the general function but it is different from the given one. I lack the 1-$$\beta$$ on that denominator. I can solve other equations but have trouble when something else, such as et+1 is added. I've also used the general method but it also turns out different. I was under the impression that I can use the iterative and general solutions for any first order linear difference equation. Am I wrong?

Any help would be greatly appreciated. Thanks!

P.S. I would like to thank the system for auto-logging me out while trying to preview my first ever post, thereby deleting a chunk of what I wrote. Good thing I saved. :\

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