Lecture
No 13.
Derivation of IS curve with classical assumption: OR
IS curve definition, IS Curve shows different combination of rate of
interest and level of national income. This curve is related to the goods
market and it is also related to the fiscal policy. The slope of IS curve
depends upon that how investment is changed in response to the change in the
rate of interest.
Derivation of IS curve:
IS curve can be derived with two different assumptions.
(1) Classical Commission (2) Keynesian
Consumption
There are many shapes of IS Curve.
(1)First, we assume that the rate of interest
is a variable in the system and IS curve is negatively sloped in this case. The
rise in investment spending will raise the level of income, Also force up the
rate of interest with given a money supply function. That is not infinitely
elastic. Now we derive IS curve with the help of panna Figures 13. 1shown below:
Figures 13. 1
The familiar investment demand
function is drown in Figure 13.1 (a). In part (B) shows the saving investment
equilibrium condition. It is drawn as a 45 degree straight line from the origin.
Because in equilibrium intended saving must be equal to intended investment. Part
(a) of Figure13.1 shows the investment
demand schedule.
When rate of interest is i0, investment equal to I0. Part (B) shows that with his amount
of investment, savings will also be equal or same magnitude S0. Part (C) shows that with an amount
of saving equal to S0,
income will be Y0. This
is the level of income that is determined by equality of intended investment
with intended saving. Part (d) shows that with rate of interest I0, and a given money supply and price level (they are in
the model, exogenous variables). the level of income that insures equality
between saving and investment is Y0. If we assume that rate of interest Falls at level i1, as resulting investment increase
from I0 to
I1. When investment
increase level of national income also increase.
If we want to get third point for IS
curve. We assume that rate of interest fall again and it come at i2 Level because of this rate of
interest investment also increase and reach at point I2 which determined with the help of
point C on investment curve because in classical assumption investment always
equal to saving. When investment is I0 saving also S0 which are equal. When saving are are
S2 new level of income determined which
is equal to Y2 and third point for IS curve is E2, with the help of three point. We
generated IS curve which shows different level of income and rate of interest
that will produce an equality between
intended investment and intended saving at alternate rate of interest. It is
downward sloping, since at the lower interest rate investment will be greater,
savings must be greater and consequently income will also be greater.
Now we see that there is no longer a single level of income at
which S = l, but level for different
rate of interest. The lower the rate of interest the higher the level of income.
This can be explain in two way. A high i means a low I (Investment) and a
low I means a low y through the multiplier process or, alternatively a low y
means a low S. In order to have income equilibrium, S (Saving) must equal to I
(Investment) in desired sense and a Low S means a low I, which is result of a
high i
Author: Nasir Mehmood Ch مصنف: ناصرمحمود چوہدری
Email: Nasirmehmoodch97@gmail.com
.jpg)
0 Comments