Question

Provide the equation for IS Curve. Why it is called the IS Curve? What is the investment equation?

please i want a typed answer not the one that is already posted and hand written please answer this questions.

Answer 1

1)

The IS curve is defined by the equation

                         C(Y-T(Y)) + I(r)+ G + NX(Y)

where Y represents income, C(Y-T(Y)) represents consumer spending as an increasing function of disposable income (income, Y, minus taxes, T(Y), which themselves depend positively on income), I(r) represents physical investment as a decreasing function of the real interest rate, G represents government spending, and NX(Y) represents net exports (exports minus imports) as a decreasing function of income (decreasing because imports are an increasing function of income).

2) It is called IS curve because it tell us that

1) If r falls , I increases

2) If I increases, Y increases through the multiplier. Y has to increase to ensure that sufficient saving is generated to balance the new level of investment.

3) So there is an inverse relation between r and Y.

3)

Investment is inversely related to interest rates, which are the cost of borrowing and the reward to lending. Investment is inversely related to interest rates for two main reasons.

1. Firstly, if interest rates rise, the opportunity cost of investment rises. This means that a rise in interest rates increases the return on funds deposited in an interest-bearing account, or from making a loan, which reduces the attractiveness of investment relative to lending. Hence, investment decisions may be postponed until interest rates return to lower levels.
2. Secondly, if interest rates rise, firms may anticipate that consumers will reduce their spending, and the benefit of investing will be lost. Investing to expand requires that consumers at least maintain their current spending. Therefore, a predicted fall is likely to discourage firms from investing and force them to postpone their investment decisions.

Hence Investment equation is written as

I(r) = I - br, where I = autonomous investment

br = Induced investment