Answer to Question #217189 in Macroeconomics for Muhammad Ali

Question

how economy will reach to general equilibrium if goods market is in equilibrium but 
money market is not. 

Answer 1

Solution

Reason for having money in the economy is to increase the ability to purchase goods and services.

When money market is not in equilibrium, it causes a decrease in the interest rate and shortage of bonds hence a rise in price of bonds.

When this happens, output increases because a falling interest will trigger higher investment expenditure by many firms.This leads to higher income, shifting money demand up and increase in equilibrium of interest rates.

This therefore triggers decrease in level of output, achieving a general equilibrium of the economy.