Algemeen evenwicht

The intersection of the IS, LM, and full employment line curves establishes the general equilibrium.

The IS curve represents combinations of output and interest rates where the goods market is in equilibrium. At every point on this curve, planned spending equals total output.

The LM curve represents combinations of output and interest rates where the money market is in equilibrium. At every point on this curve, the demand for money equals the supply of money.

In the graph, the IS and LM curves intersect at point E, which represents the joint equilibrium of the economy. At this point, both the goods and money markets are balanced.

The equilibrium interest rate, r*, at point E determines borrowing costs, and the equilibrium level of output, Y*, shows total production in the economy.

When the full-employment line, FE, is added, point E represents general equilibrium, where all three markets, goods, money, and labor, are simultaneously in balance.

However, the IS–LM equilibrium may sometimes fall below or rise above the full-employment level of output, requiring policy adjustments.