In his motherland the Negro received a very poor Economic disequilibrium is the description given to a market situation where the supplied volume of goods does not equal the demanded volume at the actual price of the goods or services. Theoretically, an economy is expected to be constant and fully predictable as per the many models and assumptions such models are based on. However, the real side of economic behavior considers market behavior an infinitely elastic entity that experiences continuous disequilibrium whose shifts have a direct effect on the economic behavior of the institution and the general fiscal and monetary planning of a national budget.
To national policymakers understanding the economic disequilibrium helps in developing predictability of the market behavior which is important in establishing an operational budget policy that can cope with the disequilibrium particularly by influencing their planning, the demand, and supply behavior in the market. This should be aimed at ensuring some form of stability that will ensure price flexibility, policy mix, and lasting fiscal and monetary policies. Therefore, what concerns especially the policymakers are the causes of the disequilibrium and how they affect the economy. Also by using the different model’s national income should be possible to be fully employed in the economy.
There may be no standard way of determining the exact cause of disequilibrium in an economy but from some developed models such as the Keynesian model, it is possible to decipher from the addressed issues in the model as causes of economic disequilibrium.
It is notable that market behavior largely depends on demand and supply behavior. The two are crucial in the determination of the interest rates charged on borrowed capital because of their impact on the level of investment. An increase in the supply volume will result in a rise in investment level as well as the domestic product which is accompanied by a reduced interest rate charged on borrowed capital. On the other hand, increased demand especially for money (for investment in the same market) will lead to an increase in the interest rate which impacts the borrowing capacity of the public which in turn leads to reduced domestic expenditure under this contractionary turn in the economy. The cyclic behavior in the shifting experienced in the supply and demand has therefore contributed to the overall disequilibrium in the economy which developed models seek to stabilize with varying success (Handa, 2000 p 309).
Whereas monetary policies focus on the supply and circulation of money in the economy, fiscal policies will be focused on the overall national expenditure and also revenue collection mechanisms (Eshag, 1983 p 23-34). The two policies work in tandem to ensure economic stability through the application of contractionary or expansionary policies depending on the market behavior and economic predictions. The policies contribute to economic disequilibrium through the shifts they cause in the demand-supply (LM) curve. When an expansionary economic policy is applied the overall effect is a rightward shift in the LM curve while increasing output and a reduction in the interest rate. The converse is true when a contractionary policy is applied which is seen as a way of reducing liquidity in the public but leads to reduced domestic consumption (demand) and reduces productivity. By all means, the application of these policies which are based on probabilistic predictions is an unstable approach that has been an important cause of economic disequilibrium.
Theoretical models explaining disequilibrium
This model emphasizes that by reducing the aggregate demand in the market, a stable equilibrium is achievable through substantial unemployment. In the model
Y = C + I + G
Where: Y = National income/output
C = Consumption
I = Investment expenditure
G = Aggregate demand
The model fails to give a predictable state of the economy because of its indeterminacy and the feedback loops it has as the economic curves shift. In this model, disequilibrium state is a continuous occurrence in the economy and so may fail to give the exact detail of economic recessional behavior but can be used to show the equilibrium stability at more unemployment. It is therefore useful in the comparison required in fiscal and monetary planning to check the desirable full employment of resources in the economy by closely monitoring the demand control policies in the economy.
The IS-LM model which was developed to address the weaknesses in the Keynesian model is used in analyzing all possible outcomes from different combinations of national income/output versus the rates of interest. The model can be used to analyze the economy at varying parameters to give the possible state at which market equilibrium can be achieved. In the combinations both the real and money aspects of the economy determining equilibrium are accounted for with the changes, they incur with different parameter changes. To make it easy in the application the model assumes that price is inelastic even with changing income. In the model, the aggregate expenditure is also used with the investment level being a function of the interest rate. However, by considering both the real and the money side, the model is able to top relate the level of national investment (input and output) and the interest charged on financial capital where the economy can safely operate within stable equilibrium by avoiding the disequilibrium combinations until it achieves full resource employment.
In policymaking, the aim is to operate the economy at the most stable equilibrium possible but where changes in the equilibrium can stimulate growth then only desirable changes are made. Therefore, by applying the different models the question is more in the model that will support the most optimal policy that can cause the economy to remain stable or regain stability following a state of disequilibrium. Both models have a way of pointing at the equilibrium point in the economy however the effectiveness of the models differs with the options they give on the possible combinations of the monetary and fiscal policies to maintain or regain stability which dictates when to apply the contractionary or expansionary fiscal and monetary policies in recessional situations of the economy.
The main weakness of this analysis is the inability to create a link on the exact time when full employment of economic resources like land, water among others. This is because the analysis was a qualitative approach that only made mention of the effect of economic disequilibrium on full employment.
References
Anonymous. 1994. Longman’s economics: our American economy. 2nd Ed. Pennsylvania: Longman. P. 104.
Chiarella, C. & Flaschel, P. 2000. The dynamics of Keynesian monetary growth: macro foundations. New York: Cambridge University Press. P 175.
Eshag, É. 1983. Fiscal and monetary policies and problems in developing countries. Victoria: Cambridge University Press. P 23-34.
Handa, J. 2000. Monetary economics. Routledge. P 314.
United Nations & Economic Commission for Europe. 1970. Multi-level planning and decision-making: papers, Volume 1968. New York: United Nations. P 112.
Wise, D. A. 1987. Public sector payrolls. Chicago: University of Chicago Press. P101.
Zilberfarb, B. 2000. IS-LM and modern macroeconomics. Vol 73. Springer. P 17-34.