Lesson 10ª

IS CURVE

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 is "B".

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 increase.

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 demand.

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