IS Curve Flashcards
IS stands for?
investment-savings
depicts the set of all levels of interest rates and output (GDP) at which total investment (I) equals total saving (S)
IS curve
At lower interest rates___
investment is higher
At lower interest rates, investment is higher____
translates into more total output (GDP)
At lower interest rates, investment is higher, which translates into more total output (GDP)
IS curve slopes downward and to the right.
IS curve displays the equilibrium in
the goods and service market for various interest rates.
degree to which firms adjust investment spending relative to the interest rate is called
interest sensitivity
A fall in the interest rate leads
an expansion of investment
Aggregate expenditure is equal to
C+I+G
Aggregate expenditures would increase and the level of output ______
would also increase
Lower levels of interest rates have generated
high level of investments and and high level of output
How is investment spending related to interest rate
Negatively related
The goods market
IS Curve
Financial market
LM curve
Equilibrium
IS-LM
IS Curve formula
Y = C (Y- T) + I (Y, i) + G
If taxes increase____
Disposable income drops, consumption drops, demand drops,
For any level of interest rate, the corresponding level of equilibrium output is now lower,
leftward shift of the IS curve.
(decrease in government consumption, increase in
taxes, decrease in consumer confidence___
for a given interest rate, decreases the demand for goods creates a shift
of the IS curve to the left.
higher sensitivity means
a drastic increase in investment spending in reaction to a relatively small reduction in the interest rate
The connection between spending and real GDP comes from
the aggregate expenditure model
Given a particular level of the interest rate, the aggregate expenditure model determines
the level of real GDP.
Now suppose the interest rate increases, what happens in the aggregate expenditure model
a reduction in autonomous spending decrease in real GDP
If there is a decrease in investment or spending, what happens to the equilibrium?
equilibrium level of output decreases. Thus the IS curve slopes downwards
higher interest rates are associated with
lower real GDP
If there is lower interest rate, what happens to Investment, Demand, Output and Consumption
As interest rate decreases, Investment, Demand, Output and Consumption INCREASES
factor that increases the demand for goods and services will shift the IS curve.
up and to the right
IS equation
=C (Y-T) + I(r) + G + NX
an increase in taxes shifts toe IS curve
to the left
What causes the IS curve to shift to the right
Government spending increases, if autonomous spending increases, investment increases or taxes falls.
Investment formula
negative relationship between Investment and Interest Rate(i)
Demand formula
AE= C + I +G
Output
Y = AE
Consumption Function
C = Cnot (autonomous) + bY
There is a _______ relationship between output and investment
Direct [I=f(i, Y)]
