Page 182 - DECO402_Macro Economics

Unit-19: Equilibrium in Product and Money Market

19.2 How would Equilibrium be Achieved? Notes

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. The excess
demand for product increases the GDP level and
deficient demand reduces the GDP. Similarly, the
excess demand for money increases the interest rate
and deficient demand for money reduces the interest
rate. The effect of the change in interest rate on actual
GDP brings the economy back from disequilibrium in
equilibrium. Figure 19.3

Self Assessment

Multiple Choice Questions:
3. The .......................... will increase because of investment multiplier.
(a) income (b) expenditure
(c) profit (d) loss
4. The high level of income means high ..........................
(a) demand (b) money demand
(c) money (d) profit
5. The excess demand of product increases the .....................
(a) GDP level (b) PDP level
(c) ADP level (d) CD level
6. The equilibrium between IS and LM curves shows the Simultaneous ................... in Product
and Money Market.
(a) equilibrium (b) disequilibrium
(c) profit (d) loss
In figure 19.3, the simultaneous equilibrium is shown on point E both the money market and product
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market meet. Assume that current income is Y instead of Y . It’s mean is such situation in which
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demand of money has reduced and the balanced interest (r ) rate in money market is on lower level
2
which is similar to point E on LM curve. Now when interest rate has reduced the plan to more
2
investment in economy will be made. There will be rise in income because of the process of investment
multiplier. Now economy will be shifted to E and income will be Y on increasing. But the high level
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of income means the high money demand and accordingly the found of high balanced interest rate
in money market. Accordingly, investment expenditure will reduce which means many times fall in
this level. This process of arrangement will be go on until the economy doesn’t reach till it’s initial
equilibrium point E , where product market and money market are balanced simultaneously i.e., the
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equilibrium level of r interest rate and that of Y income.
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