Figure 5 illustrates a standard exercise in which a perfect-foresight equilibrium is perturbed. Suppose that at time 0 it is known that the stock of knowledge will undergo an exogenous increase of size A at time T and that no other exogenous changes will occur. Usual arbitrage arguments imply that the path for any price like X(t) must be continuous at time T. The path followed by the equilibrium in the phase plane starts on a trajectory like t, such that at time T it arrives at a point
exactly A units to the left of the trajectory CE from figure 4, which
would have been the equilibrium in the absence of any exogenous
change in k.