Answer to Question #217176 in Macroeconomics for Muhammad qaiser

Question

Discuss with help of graph (s) the general equilibrium of the economy

Answer 1

Equilibrium is the state of being stable. For an economy to be at equilibrium, the market demand should be equal to market supply thereby achieving stable prices.From the above graph the supply curve (s) intersect with demand curve(D) at point E which is the equilibrium point. P is the equilibrium price while Q is the equilibrium quantity.

At equilibrium investment- savings (IS) and liquidity preference-money supply (LM) are equal. The intersection of IS and LM curve is the equilibrium point while I* is the equilibriume rate of interest and Y* the equilibrium income.