Page 180 - DECO402_Macro Economics

Pavitar Parkash Singh, Lovely Professional University Unit-19: Equilibrium in Product and Money Market

Unit-19: Equilibrium in Product and Money Market Notes

Contents
Objectives
Introduction
19.1 Simultaneous Equilibrium in Product and Money Market
19.2 How would Equilibrium be Achieved?
19.3 Summary
19.4 Keywords
19.5 Review Questions
19.6 Further Readings

Objectives

After studying this unit, students will be able to:
y Know the Simultaneous Equilibrium in Product and Money Market,
y Study ‘How would equilibrium be achieved.

Introduction

An economy can come in equilibrium from non-equilibrium by Automatic Adjustment Process.
Adjustment process can bring the change in actual GDP or interest rate or in both. There can be either
excess demand for goods or excess demand for money or excess supply for goods or excess supply
for money or excess for both on any imbalance point.

19.1 Simultaneous Equilibrium in Product and Money Market
On equalling the IS and LM functions, the simultaneous equilibrium in both the product and money
market is found. According to the equilibrium in product market, the IS function shows the different
coincidences of actual GDP and interest rate (r). According to the equilibrium in money market, the
LM function shows the different coincidences of actual GDP and interest rate (r). The Simultaneous
Equilibrium in both the product and money market is found on point E in figure 19.1 where IS curve
is Intersecting the LM Curve. In other words, the equality between the IS and LM Curves show that
one coincidence of actual GDP and interest rate which clear both the product market and money. OY
income and Or interest rate is that coincidence which equals the IS and LM functions. The equilibrium
between IS and LM curves shows the simultaneous equilibrium in product and money market.

Notes On equalling the IS and LM functions, the simultaneous equilibrium in both the
product and money market is found.

LOVELY PROFESSIONAL UNIVERSITY 173