We are now going to suppose that the goods market
is at the balance point "A".
What happens when the interest rates increase?
Investment and demand decrease: this means that the demand
of goods and services curve goes down. The new point of balance
Offer Goods =
Demand for Goods =
A= With the interest rate io is the equilibrium production Yo
B= If rising interest rates i1 produce a low equilibrium Y1
What happens if interest rates decrease?
The opposite will happen, investment increases and so does
demand. The demand curve will go up and there will be a new
balance point "C".
You see, therefore, that increases in the interest
rate make the balance point in the goods and services market decrease,
whilst decreases in the interest rates make the balance point
If we represent the relationship between balanced
demand and interest rates we will obtain the IS curve.
The IS curve, therefore, represents the points
in which every interest rate you can see the corresponding balanced