ABSTRACT
Internal equilibrium can be considered a state of full employment with price stability. A more comprehensive treatment incorporates capital flows, but before this can be undertaken, it is necessary to review how equilibrium is established in closed and open economies within a framework of IS-LM curve analysis. Changes in either leakages or injections will change equilibrium income. Increases in leakages/decreases in injections will decrease income, while decreases in leakages/ increases in injections will have the opposite effect. Changes in either leakages or injections will cause changes in interest rates or income levels or both and corresponding shifts in the IS curve. External equilibrium is equality between external autonomous debit and credit transactions on current and capital account. It is represented by the external equilibrium curve which identifies different combinations of interest rates and income levels for which the foreign sector is in equilibrium.
