Page 171 - DECO402_Macro Economics

Macroeconomic Theory

Notes III. Relationship between different levels of r and GDP on the one hand
and the quality between S and I
on other: IS Curve

We see that the balanced level of GDP is
analogous to every level of ‘r’ that tells the
homogeneous equality as similar to saving (S)
and investment (I). You should be determinant
that the work of high level of ‘r’ is the lower
level of GDP and saving (S) and investment (I)
is the analogous equality. On the other hand,
the mean of the lower level of ‘r’ is the high
level of GDP (Which happens by the high level
of AE and I) and being the analogous equality
between S and I.
In figure 18.4, the IS curve is shown which is
derived from figure 18.4 (A). The IS curve shows
that combination of actual GDP and Interest rate
where the desired expenditures of economy
are equal to total product. On the interest rate
‘Or’ given in Part-B, balanced actual GDP level
is OY which is determined on making the line
AE in part A and aggregate product line equal.
This combination (OY, Or) of actual GDP and
interest rate is shown by point A in part B.
similarly point B is the combination of OY
1
actual GDP level and Or interest rate in part
1
B. The actual GDP level on Or interest rate is
2
OY , which is shown by point c in part B. We
2
get the IS curve on joining these all combination
points (as A, B, C) of actual GDP and interest
rate. There every point on IS Curve shows the
equilibrium in commodity market.
The points situated on the right or left of IS
curve, show the imbalance in commodity
market. If we take point M (In figure18. 4B)
it is right from IS curve. It is known from this
point that there is imbalance between AE and
Y in part A. So total production is greater than
total expenditure or the saving is greater than
investment (Y > AE, ⇒ S > I). Similarly, any Figure 18.3
point on left of IS Curve, as point N, indicates
that combination of GDP and Interest rate where total expenditure is greater than total production
and investment greater than saving (AE > Y, → I > S).

Slope of IS Curve

The IS Curve is derived from the combination of actual GDP level and interest rate. It’s slope is
downward from left to right. It means that high interest rate decreases the actual GDP because of less

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