Question

Explain in detail what information is conveyed by an IS curve.

Answer 1

IS stands for "investment-savings" and is related to the goods market. The IS curve set of all levels of interest rates and output (GDP) at which total investment (I) equals total saving (S). IS curve slopes downward to the right. At lower interest rates, investment is higher, which helps in the production of more total output(i.e.GDP) and vice versa. When there is a change in the government spending, both income and interest rate respond positively, increase in taxes or reduction in government expenditure or both reduce the level of income and thus shifts the aggregate expenditure curve to the leftwards.

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