Return to Contents Page

 


The IS Curve

There are several more or less equivalent ways to arrive at an IS Curve.

Loanable Funds

Getting Started with EconModel

The EconModel presentations are interactive graphical simulations of models.  more info.

To activate the EconModel presentation you need to download and install the EconModel program.  more info.

EconModel (Loanable Funds) Graphical

The EconModel presentation for the IS/LM Model constructs an IS Curve graphically from equilibrium movements in the supply and demand for loanable funds.  The IS Curve shows those points that are consistent with equilibrium in the supply and demand for loanable funds. 

Physical Investment

An alternative, more common view is that the IS Curve shows those points that are consistent with C + I + G = C + S + T.  These two views are operationally equivalent if you take the supply of loanable funds to be S and the demand to be I + G - T.  That, is real capital investment is financed by borrowing.

General Algebraic

An algebraic approach is to let savings be a function S(Y) of income and let investment be a function I(R) of the interest rate.  An increase in income Y causes more savings.  This forces down the interest rate R so that investment increases and the identity I(R) +G - T = S(Y) is maintained.  The IS Curve is thus downward sloping.  The increase in income Y causes increased savings, which drives down the interest rate and increases investment.

Simple Keynesian Model

The EconModel presentation for the Simple Keynesian Model derives an IS Curve under the simplifying assumptions of that model. 

IS/MP Version

References

Summer 2006  Summer 2004

 
Link:  Keynesian Models

Comments?  Questions?  macro-at-econmodel-dot-com  Copyright 2006 William R. Parke