Created 4/10/1998
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From Investment Demand to the IS Curve: High Interest Rates

J. Bradford DeLong

The IS curve summarizes the information in the investment demand function and in the income-expenditure diagram. It tells us what the level of equilibrium national income will be for each possible level of the interest rate. Each possible level of the interest rate generates a different level of investment; and each level of investment generates a different position for the total expenditure (or aggregate demand) line on the income-expenditure diagram.

A high level of the interest rate leads to a low level of investment: few projects are worth undertaking given the high cost of capital. Because investment is low, total spending is low for any level of national income. Thus equilibrium national income is low.

This situation is captured by a point on the upper left segment of the IS curve.

From Investment Demand to the IS Curve: Low Interest Rates  

Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax

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