Question

Consider the general equilibrium model of the bank as introduced in the class. (Reminder about assumptions and notation: 2 periods model with an endowment ω1 of a unique good owned by household, partly invested and partly consumed. Household consumes C1,C2 at periods 1, 2 respectivelly. Households allocate savings S between bank deposits D+ and securities Bh. The firm has production function f(I). )

(a) Explain what is the major difference between partial and general equilibrium approaches (this is a general question, you should an- swer this in general terms, not in the terms of this particular general equilibrium model of the bank).

(b) Characterize the general equilibrium in this model. Define what is the general equilibrium in this model and clearly characterize the two major parts of equilibrium determination.

Answer 1

*Answer:

Partial equilibrium is a state of equilibrium in economics which takes into consideration only a part of the market to attain the equilibrium. one variable analysis without considering other factors

For example, law of demand is studied in relationship with price by keeping all other factors constant. , stating other factors constant

2.General equilibrium is the equilibrium that studies an economic phenomenon by taking all the aggregate units in the economy into consideration.

product prices make demand for each commodity equal to its supply and factor prices make the demand for each factor equal to its supply so that all product markets and factor markets are simultaneously in equilibrium.

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