Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
what relationship does IS curve plot? explain in words and graphically, why IS curve slops downward.
Expert Solution
Step 1
In Keynesian economics, the equilibrium interest rate and income level are determined by the IS-LM model. In the IS-LM model, the equilibrium interest rate and income level are determined at a point where the IS curve of the economy intersects the LM curve of the economy.
The LM curve of the economy shows all the combinations of income and interest rates at which the money market of the economy clears. The LM curve is an upward sloping curve showing the existence of a positive relationship between income level and interest rate in the economy.
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