 general equilibrium in the complete ISLM model. Dear students, general equilibrium simrath is that when all markets are simultaneously in equilibrium, this is called general equilibrium. All markets simrath is labour market, goods market and the assets market. So, where the FE line IS curve and LM curve will intersect. FE, you know FE line represents your labour markets and IS curve goods market and LM curve assets market. So, when these three curves intersect at the same place, this will be the general equilibrium. Graphically, you can see IS curve negatively sloped. Now, you know this. These are the combinations of Y and R goods market. And this is the positively sloped LM curve. These are the pairs of Y and R assets market and money market. And this is the pole employment line, with which labour market is in equilibrium. So, these three curves intersect at the E point. So, this will be your general equilibrium. Okay. So, we will understand this. Suppose there is a temporary adverse supply shock. So, how will this general equilibrium affect and how will this restore? So, suppose the productivity parameter in the production function falls temporarily. We have understood that if your productivity falls for some reason, then your production function will shift downward. Let's say productivity falls. So, what will happen in the three curves? The supply shock will reduce the marginal productivity of labour. When production function is downward, then the marginal product of labour decreases and your labour market demand curve shifts downward. So, the supply shock reduces the marginal productivity of labour and hence the labour demand. So, with lower labour demand, the equilibrium real wage and employment fall. When labour demand decreases in labour market, then real wage will decrease and employment level, which is determined by demand and supply, will be reduced. So, lower employment and lower productivity. What happened? Because of the productivity shock, your marginal product of labour and labour demand decreased. In labour market, real wage and employment level have decreased. So, overall output will be produced. Since people are working less than before, employment level will be reduced. Because of this, output will be reduced. And since people are working less, their productivity will also be reduced. So, these two things will reinforce each other. As a result, output will be reduced. What are the two things? Because of the lack of employment level and because of the productivity fall, your output will be reduced. As a result, your FELine, which represents this output, full employment level of output, will shift downward. What happened in this productivity shock? We have discussed how FELine will affect it, it will shift downward. There is no effect of a temporary supply shock on the IS and LM curve. This temporary shock of productivity will be reduced. In this, FELine is affecting labour market and FELine is affecting it. But in this, the other two curves, IS and LM curve, these two will not affect it. Why will they not affect it? Because you know that the IS curve represents the equilibrium of your goods market. In other words, we can say that it reflects the equality of desired savings and desired investment. So, productivity shock, since it is temporary, therefore, it will not have a desired national saving and it will not have a desired investment. Because the curve of desired savings is with current income, we will move along with the IS curve. If we do LM curve, then the financial and your assets market will have no impact on this productivity shock. Since the FEIS and LM curve do not intersect, the price level adjusts shifting the LM curve until a general equilibrium is reached. Now, we understand from the diagram that how this process will happen. So, in this case, the price level rises to shift the LM curve up and to the left to restore the equilibrium. Let's see with the help of this diagram. This is the same diagram on the left side for general equilibrium. There is an EO point on which three curves intersect each other. So, this is the general equilibrium. So, IS curve, LM curve, and this is your initial FE line. If these three intersect, then this is your general equilibrium from which we are starting. Because of the productivity shock, the FE line has shifted to the left. The full employment level of output will decrease because I have just told you that in the labour market, your labour demand curve will decrease, the employment level will decrease, the productivity will fall, as a result of all these things, your full employment level of output will decrease and the FE line will shift to the left. Now, when the FE line has shifted, you are intersecting IS curve and FE 2 to each other. But LM curve, there is no common intersection point for these three. So, what will happen now? Actually, what is the situation on E point? E point, which was the first equilibrium point, now the total output is less than that. Right? When the total output is less, when the supply is less, then the price level will increase, and the increase in the price level, as we saw in the last module, when the price level will increase, then the real money supply will decrease and the LM curve will shift upward. So, the prices will increase. What was in your goods market? You had more demand, but the supply was less. The profit maximizing output level, the firm on which their profit is maximizing, the demand in the market is more than that. So, what will happen next? The firms will start increasing the prices, and the real money supply will work with that and the LM curve will shift upward. So, the F will intersect the LM 2 curve on the F point, and the three markets will simultaneously become equilibrium. So, what will happen in this process? The price level tells you why the LM curve will shift, and the prices will increase. So, the prices will increase, which means the inflation rate will increase. But when the prices will reach equilibrium again, then the prices will become stabilized. So, inflation will rise, but it will not permanently rise. It will rise temporarily, and when it will become equilibrium again, this rise will be closed. So, let's summarize all these things. Real wage, employment, and output will decline. Let me show you again. We are talking about this point now, F. Initially, we were at point E. When it is on F, the output will decrease, the left side will move, the LM curve will shift, and the output will decrease. Why did it decrease? That's why employment in the labour market decreased. The demand and employment level decreased. So, we are talking about real wage, employment level decreased, output decreased, while the real interest rate and the price level increased. The LM curve shifted from the price level to the price level. Now, this point, F point is above E. So, the interest rate on E is higher than F. So, it is saying that due to this shock, the price level has increased and the interest rate has increased. So, there is a temporary burst of inflation as the price level moves to a higher level. There is an increase in inflation, but when prices become stable again, inflation will increase. Since the real interest rate is higher and output is lower, consumption and investment must be lower. When the real interest rate increases, what will happen in this case? The real interest rate will increase, the real interest rate will increase, the consumption will decrease, and the real interest rate will increase, and the investment will also decrease. So, this is the summary of this case. What are the changes? Thank you very much.