Lecture
No.12
Derivation
Of IS Curve with the Help of Aggregate Supply and Aggregate Demand Approach.
Definition
of IS Curve (Keynesian economics):
IS curve shows the different combinations of rate of interest
and level of national income. At which intended saving and intended investment
are also equal. This curve is related to the goods market and it is also
related to 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 with AS and AD Approach:
Figure
No 12. 1:
In part a of above Figure of (AD) aggregate demand curve
which is the aggregate of three factors, consumption, investment and government
expenditure and (AS) aggregate supply curve which is the line through the
origin. These two curves intersect at E0. At E0 level of national income
is y0.
In part B of Figure 12.1 at I0 rate of interest level
of national income also y0. So point A is first point for IS curve. If investment
increases and AD curve shift upward and intersect. AS curve at newly point Which
is E1 and level of national income is Y1. Which is Greater than the level of Y0.
In B part of Figure 12.1 at i1 rate of interest national income level is
i1. In this market B is 2nd point For IS curve. It is clear
in all the above discussion that if we reduce our rate of interest then
investment will also increase when investment increase level of national income
also increased. In this way, IS curve have negative slope. We make it with the
help of two points A and B.
Author: Nasir Mehmood Ch مصنف: ناصرمحمود چوہدری
Email: Nasirmehmoodch97@gmail.com
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