## What does it mean to derive the IS curve?

Derivation of IS Curve: The IS-LM curve model emphasises the interaction between the goods and money markets. The goods market is in equilibrium when aggregate demand is equal to income. The aggregate demand is determined by consumption demand and investment demand.

How do you derive the equation of the IS curve?

The Derivation of IS Curve: Algebraic Method: 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.

What is the IS curve equation?

Algebraically, we have an equation for the LM curve: r = (1/L 2) [L 0 + L 1Y – M/P]. r = (1/L 2) [L 0 + L 1 m(e 0-e 1r) – M/P].

### IS curve simple explanation?

A curve is a continuous and smooth flowing line without any sharp turns. One way to recognize a curve is that it bends and changes its direction at least once.

What are the implications of IS curve?

The IS curve is generally downward sloping because as the rate of interest falls, it encourages investment which boosts up aggregate demand thereby increasing the level of national income. Therefore an inverse relationship exists between rate of interest and national income which causes IS curve to slope downward.

HOW IS curve is derived from the goods market?

In the derivation of the IS curve we seek to find out the equilibrium level of national income as determined by the equilibrium in goods market by a level of investment determined by a given rate of interest. Thus IS curve relates different equilibrium levels of national income with various rates of interest.

## What do the points of IS curve imply?

The IS curve shows the points at which the quantity of goods supplied equals those demanded. On a graph with interest (i) on the vertical axis and aggregate output (Y) on the horizontal axis, the IS curve slopes downward because, as the interest rate increases, key components of Y, I and NX, decrease.

What do you mean by money market equilibrium derive LM curve when does the LM curve shift use diagram to explain?

Every point on the LM curve represents an intersection between the real money supply (M/P) and real money demand (Ld). The LM curve will shift whenever the variables we hold fixed, other than Y, in the money-supply/money-demand diagram change. These variable are M/P and e.

What is the slope of IS curve?

The slope of the IS curve also depends on the saving function whose slope is MPS. The higher the MPS, the steeper is the IS curve. For a given fall in the interest rate, the amount by which income would have to be increased to restore equilibrium in the product market is smaller (larger), the higher (lower) the MPS.

### What shifts the IS curve?

Movements along the IS curve: As interest rates rise, output falls. Shifts in the IS curve: As government spending increases, output increases for any given interest rate. IS Curve: At lower interest rates, equilibrium output in the goods market is higher. An increase in government spending shifts out the IS curve.

How to derive the IS curve?

While deriving the IS curve we have to remember three points: 1. If the r falls, I increases. 2. If I increases, Y increases through the multiplier. Y has to increase to ensure that sufficient saving is generated to balance the new level of investment. 3. So there is an inverse relation between r and Y. Fig. 9.6 shows how the IS curve is derived.

What is the IS curve in economics?

The IS curve is defined as a locus of points showing alternative combinations of Y and r such as (r 0, y 0 ), (r 1, y 1 ), (r 2, y 2) which ensure commodity (product) market equilibrium.

## Why is the IS curve derived from Y and R?

Every point on the IS curve represents an intersection between desired national saving and desired investment for some income/interest rate pair (Y,r). As such the IS curve is derived holding the determinants of saving and investment, other than Y and r, fixed.

What is the slope of the IS curve?

The Slope of the IS Curve: The IS curve is negatively sloped, because a higher level of the interest rate reduces investment spending, thereby reduc­ing aggregate demand and thus the equilibrium level of income.