Page 181 - DECO402_Macro Economics

Macroeconomic Theory

Notes Disequilibrium
Except point E, no any point shows the equilibrium in
product market or money market or both. All the points
as A, B (except point E where IS = LM) on IS curve in
figure 19.2 show the equilibrium in product market but
disequilibrium in money market. All the points as A, B
show those different coincidences of interest rates and
actual GDP which equals the total expenditure and total
product or saving and investment. Similarly, the points
as M, N (except point E where IS = LM) on LM curve in
figure 19.2 show the equilibrium in money market but
disequilibrium in product market. All the points on LM
curve show those different coincidences of interest rates
and actual GDP which equals the demand for money
and supply of money. Which are neither situated on LM
Curve nor on IS curve, they indicates the disequilibrium Figure 19.1
in both the product and money market.
Assume, if we take point T, which is situated on the left of
IS curve, this point T shows that one coincidence of actual
GDP and interest rate in which total expenditure is more
than total product, which means that the investment is
more than saving (AE > Y, I > S). Therefore any point on
left of IS curve shows that AE > Y and I > S. The point on
right of IS curve (as V) shows those coincidences of actual
GDP and interest rate where total production is more that
total expenditure or more than investment (Y > AE, ⇒
S > I). Therefore any point on right of LM curve (as K)
shows those coincidences of actual GDP and interest rate
where money demand is more than money supply (L >
M). Similarly, any point on left of LM curve (as L) shows
those coincidences of actual GDP and interest rate where
money supply is more than demand (M > L). Therefore, Figure 19.2
all those points which are not situated on IS or LM curve,
show the disequilibrium in either product market or money market or both.

Did You Know? An economy can come in equilibrium from non-equilibrium by Automatic
Adjustment Process.

Self Assessment
Fill in the blanks:
1. Adjustment process can bring the ..................... in actual GDP or interest rate or in both.
2. Investment expenditure will decrease which means that the many times ................ in level.

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