In this video we will discuss about IS curve and derive it algebraically
The IS ( Investment Saving curve is derived from goods market equilibrium. The IS curve shows the combinations of levels of income and interest at which goods market is in equilibrium, that is, at which aggregate demand equals income.
Aggregate demand consists of consumption demand, investment demand, government expenditure on goods and services and net exports. Also we know that Consumption demand is function of disposable income. Disposable income is level of income minus taxes (Yd = Y - T) where Yd stands for disposable income and T for taxes. However, in a two-sector model where we do not incorporate taxation by the government, Yd = Y.
Investment depends on rate of interest. With a given level of income, a higher rate of interest reduces investment demand and a lower rate of interest leads to more investment, that is, investment is negatively related to rate of interest. Thus,
I = I - di
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