Recall IS Curve is based on the equation:
S-I=(G-T)+(X-M)
The graph above shows the 2 sides of the equation.
The question is: if the y-axis is represented by the real interest rate how is it possible that an increase in r shifts the S-I curve to the right? This increase in r should be a movement along the sme S-I curve. Another question: does each point of the S-I curve (the solid one for example) represent a constant value of S-I or in the same curve S-I varies?
Last question: The two equilibrium (the second one obtained by the shift of the S-I - dashed S-I line) occur at the same level of S-I (and so level of (G-T)+(X-M)) or a different level of S-I?
hey… i m studying aggregate demand and supply too these days…
its actually a decrease in interest tht shifts the S-I to the right… and the reason is … because when the interest are low… ppl can invest more (they d have to pay less interest on borrowed money which they will use for investing) so this would make (s-I) small and it shifts down instead of moving cuz for equilibrium it needs to be equal to the (g-t) + (x-m)… but if it moves along the (S-I) curve… it cant meet the other curve… so a shift is the only way to decrease while maintaining equality with (g-t) + (x-m)
each point on S-I curve represents a different value i think…
the equilibrium is at 2 different values of S-I …
i am also learning these things so i dont know if my answers are a 100 percent correct…
Hi,
Digging up this topic because i’m going through the same torments .
If interest rates decrease, why is it necessarly S - I that reacts (shift down to the left)? Why wouldn’t we keep it constant and rather shift (G-T) + (X-M)?
The assumption is that government spending, taxes, imports, and exports aren’t affected by interest rates. (Stupid, perhaps, but that’s the assumption.)
Saving is clearly affected by interest rates: when rates increase, there’s incentive to save more, and vice versa. Investment is clearly affected by interest rates; when rates increase, there’s incentive to invest less (i.e., buy less capital equipment, because financing costs are higher), and vice versa. So, when interest rates increase, saving increases and investing decreases, so S − I increases, and vice versa.
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