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Unit 9: General Equilibrium of an Economy: IS-LM Analysis

Notes
Figure 9.3

Since product market equilibrium at any selected interest rate could be maintained only
with an increase in the level of income, this upward shift in the consumption function
(or a downward shift in saving function) implies a rightward shift in the IS schedule.
Conversely, a downward shift in consumption function (or an upward shift in saving
function) will shift the IS-curve downward and to the left.
The Positions of the IS-curve: The diagram given below (Figure 9.4) shows two additional
disequilibrium points G and H. At G, the national income is the same as at E but the rate
of interest is lower (r ). Consequently, the demand for investment is higher than that at E
2
as also the demand for commodities. This simply means that the demand for goods must
exceed the level of output, and so there is Excess Demand for Goods (EDG). Likewise, at H,
the rate of interest is higher than F, and there is Excess Supply of Goods (ESG).
Figure 9.4

Thus points above and to the right of the IS-curve like H, are points of excess supply of goods
(ESG). By contrast, points below and to the left of IS-curve are points of excess demand for goods
(EDG). At a point like G, for instance, the interest rate is too low and aggregate demand is too
high relative to output.

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