A dynamic hypothesis is an idea about what structure might be capable of generating behavior like that in the reference modes. For this example we can formulate a dynamic hypothesis simply by thinking about how the two variables in the reference mode are connected — that is by specifying the set of policies (or rules) that determine production given sales. The dynamic hypothesis for this firm is that a manager is setting production based on current sales, but is amplifying the amount resulting in higher (or lower) production than is necessary. The reference mode supplies us with two variables — production and sales — that we will want to include in the model. This is a reasonably good basis on which to begin a sketch, so let us put these variables down to start the model.
