Lecture No 14.A
If investment is not change by the change in rate of interest.
IS Curve become vertical straight line as rate of interest increase
investment demand remain same. It is not affected by the rate of interest. In
other words investment demand curve is completely inelastic in response to the
change in the rate of interest.
We drive completely inelastic curve with classical assumption as below:
We drive completely inelastic curve with classical assumption as below:
An investment demand function is drown in part (a), part (b) shows
equilibrium condition of investment and savings. Investment demand function in
part (a) is a vertical straight line which shows that various level of rate of
interest does not make change in investment curve in depression days. When an
economy under depression rate of interest cannot increase the investment and
investment is equal to I0 which is constant at different rate
of interest level.
In part (b) a straight line is drawn as 45o from the origin
because in equilibrium intended saving and intended investment always equal. Part
(c) shows that when magnitude of saving is S0, income will be Y0. This level of income determined by
equality of investment and savings. In part (d) shows that with an
interest rate i0 and given money supply and price level. The level of
national income that insures equality between intended investment and intended
saving is y0.
We could pick another interest rate and find equilibrium level of
income.
The level of income is not effected because our investment is not
in increasing with decreasing rate of interest, investment remaining constant.
In this way, get 2nd point For IS curve which is E1.
We may take 3rd point for IS curve, with the help of another rate of interest i2.
At this rate of interest investment remain constant I0. Saving and
investment also remain constant at I0 and S0. Level of national income y0 and
saving are S0. In part (c), E2 is 3rd point for
IS curve. An IS curve is is generated which showing the same level of income
that will produce an equality between intended saving and intended investment.
At various rate of interest and IS curve is a straight vertical line where
level of income is Y0 which is constant.
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