Question

3. Deriving the IS Curve: Use an income/spending graph and IS curve graph to show the shortrun impact of an increase in the interest rate on output in the goods market. Include a brief explanation in your answer and be sure to properly label your graphs.

4. Shifting the IS Curve: Use an income/spending graph and IS curve graph to show the shortrun impact of an increase in autonomous investment on output in the goods market. Include a brief explanation in your answer and be sure to properly label your graphs.

thank you!!

Answer 1

Answer 3: IS curve represents investment and saving curve in good market . It represents the good market equilibrium.  

When interest rategoes down, higher will be the equilibrium level of national income.

In the figure, Rate of interest is r0 ,planned investment is Io. Aggregate demand curve is C+Io and output level is OYo level of national income. When the rate of interest fall to r1,planned investment increase I1. . Increased in planned investment ,aggregate demand curve will shift C+I1 in good market at OY1 equilibrium level of national income. So as rate of interest will fall national income of an economy will increase because at lower rate of interest , people will attract and invest more . So joining point A,B,D we get the IS curve . It is downward sloping .