2. Introduction
In 1937, Hicks present this concept of IS curve in his article “classicals & Mr. J.M
Keynes”.
Hicks established a relationship between income and rate of interest.
It is also known as investment saving curve.
It shows equilibrium in goods market.
Definition:
“IS curve shows negative relationship between interest rate and the level of
income that arises in market for goods an services”.
3. Assumption
To derive IS curve we assume the following:
Two sector economy where the government is excluded and no foreign trade.
Y=C+I
C=CO+CY
I=I0+Vi
saving depends on income.
Investment depends on interest rate.
Price level does not change.
Monetary wages remains the same.
Economy has unused resources.
4. Steepness of IS curve
The amount of investment increases with the reduction in ‘i’.
Secondly on the magnitude of multiplier.
5. Negative slope of IS curve
An IS curve shows the different combinations of interest rate and level of national
income such that saving equal to investment.
An IS slope downward from left to right since these negative relationship between
investment and the interest rate therefore, IS curve slopes negatively because at
the higher level of interest rate the investment reduces which in turn reduces the
AD and then equilibrium level of output and income reduces.
6. Shifting of IS curve
IS curve shift due to change in investment.
IS curve shift due to change in saving.
In three sector economy:
IS curve shift due to change in investment.
IS curve shift due to change in saving.
IS curve shift due to change in government expenditure.
IS curve shift due to change in taxes.
