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 low level of the interest rate leads to a high level of investment: many projects are worth undertaking given the low cost of capital. Because investment is high, total spending is high for any level of national income. Thus equilibrium national income is high.
This situation is captured by a point on the lower right segment of the IS curve.
|From Investment Demand to the IS Curve: High Interest Rates|
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