An Introduction to Economic Dynamics

An examples-driven treatment of introductory economic dynamics for students with a basic familiarity with spreadsheets. Shone approaches the subject with the belief that true understanding of a subject can only be achieved by students themselves setting out a problem and manipulating it experimentally. Although all economics students now have access to spreadsheets, they are often used for little more than graphing economic data. This book encourages students to go several stages further and set up and investigate simple dynamic models. The book presents the essentials of macro and micro economic dynamics, including: demand and supply dynamics, Keynesian dynamics, IS-LM, Inflation-unemployment, dynamics of the firm, rational expectations and saddle points, fiscal dynamics and the Maastricht Treaty and Chaos theory. The Book contains 50 exercises. The support website contains an additional 100 questions for students and 100 for lecturers. Visit www.cambridge.org/resources/economics

List of tables and boxes

viii

Preface

ix

Introduction

Definitions and concepts

1

(2)

Dynamic models

3

(2)

Deterministic dynamical models

5

(1)

Dynamical systems on a spreadsheet

6

(3)

Experimentation

9

(1)

Difference equations

10

(2)

Attractors and repellors

12

(2)

Nonlinear dynamical systems

14

(6)

Continuous models

20

(2)

Continuous differential equations on a spreadsheet

22

(3)

Conclusion

25

(2)

Exercises

25

(2)

Demand and supply dynamics

Beyond the textbook

27

(4)

The linear cobweb model

31

(3)

Experimentation

34

(1)

Different expectations

35

(2)

The Goodwin model of expectations

37

(2)

Nonlinear cobwebs

39

(1)

Ceilings and floors

40

(3)

Cobwebs in interrelated markets

43

(5)

Exercises

45

(3)

Simple Keynesian dynamics

The Keynesian-cross diagram

48

(2)

Some simple dynamics

50

(2)

Experimentation: 1

52

(2)

The dynamic multiplier

54

(2)

A dynamic model with taxes

56

(2)

Experimentation: 2

58

(2)

The multiplier-accelerator model

60

(3)

Introduction of net exports

63

(3)

Experimentation: 3

66

(3)

Exercises

67

(2)

Constructing trajectories in the phase plane

Trajectories and fixed points

69

(3)

Isoclines and vector forces: continuous models

72

(2)

Constructing continuous trajectories with a spreadsheet

74

(2)

Isoclines and vector forces: discrete models

76

(1)

Constructing discrete trajectories with a spreadsheet

77

(1)

A cautionary note

78

(1)

A variety of trajectories

79

(5)

Limit cycles

84

(1)

Lorenz curves and strange attractors

85

(2)

Conclusion

87

(4)

Exercises

89

(2)

IS-LM dynamics

The static model

91

(3)

Instantaneous money market adjustment

94

(4)

A continuous model

98

(3)

Continuous IS-LM on a spreadsheet

101

(4)

A discrete version of the IS-LM model

105

(2)

Interest rate ceiling

107

(1)

Conclusion

108

(2)

Exercises

108

(2)

Inflation-unemployment dynamics

The Phillips curve

110

(1)

A simple macroeconomic model of inflation

111

(4)

The dynamics of the simple model

115

(2)

Dynamic model with positive inflation

117

(6)

A change in the money supply

123

(1)

A change in the natural level of unemployment

124

(1)

Continuous model

125

(2)

Conclusion

127

(3)

Exercises

128

(2)

Dynamics of the firm

Introduction

130

(1)

Monopoly and advertising

130

(3)

Advertising model: discrete version

133

(2)

Diffusion models

135

(3)

Static theory of oligopoly

138

(2)

Discrete dynamic model with output adjusting instantaneously

140

(2)

Dynamic oligopoly with three firms

142

(1)

Partial-adjustment duopoly model

143

(6)

Exercises

146

(3)

Saddles and rational expectations

What are saddles?

149

(1)

Two examples

150

(7)

The Dornbusch model under perfect foresight

157

(4)

A numerical example

161

(3)

A rise in the money supply

164

(2)

Announcement effects

166

(4)

Discrete systems exhibiting saddle solutions

170

(4)

Exercises

172

(2)

Fiscal dynamics and the Maastricht Treaty

Budgetary concepts

174

(2)

Budget dynamics with no inflation and no monetary financing

176

(4)

A numerical example

180

(1)

Budget dynamics with inflation and money plus bond financing

181

(3)

Some numerical examples

184

(4)

Budget criteria of the Maastricht Treaty

188

(3)

Some final observations on the Maastricht Treaty

191

(3)

Exercises

192

(2)

A little bit of chaos

Introduction

194

(1)

Defining bifurcations

195

(3)

Saddle-node bifurcation

198

(2)

A transcritical bifurcation and a pitchfork bifurcation

200

(2)

The logistic equation, periodic-doubling bifurcations and chaos

202

(5)

Sensitivity to initial conditions and unusual patterns

207

(2)

Van der Pol equations and a Hopf bifurcation

209

(2)

Lorenz equations again

211

(4)

Exercises

213

(2)

Brief answers to selected exercises

215

(5)

FREE SHIPPING

Amazon no longer offers textbook rentals. We do!

An Introduction to Economic Dynamics

Summary

Table of Contents

Supplemental Materials