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Why does the IS curve have the shape that it does? Explain using words and diagrams.

Why does the IS curve have the shape that it does? Explain using words and diagrams.

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Answer #1

The IS curve is indeed a downward sloping curve and this is because of the fact that if the interest rate actually decreases then what happens is that the demand for investment increases on the whole and this actually gets to trigger a multiplier effect on the consumption levels of the nation as a result of which the total output increases on the whole with the GDP increases and that is the reason why IS curve is downward sloping as shown in the figure.

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