Derivation of the IS Function, Macroeconomics Video Lecture | Macro Economics - B Com

the is-lm primer
diacyl and primer is used for
determining the general level of
equilibrium in the economy general
equilibrium in the sense that all the
markets in the economy are at
equilibrium at the same time loudly into
sector economy in there are two markets
one is the product market and another in
the money market
so the overall equilibrium requires that
product market and money market are
simultaneous in equilibrium before is
established in such general equilibrium
point we first derived the is curve and
a y LM curve individually the is curve
is curve shows the level of interest and
the level of income that leads to the
equilibrium and product market in other
words is curved swords the interest
rates and income levels that can equate
the demand and supply in the product
market due to sector economy total
demand is equal to the sum of
consumption expenditure see and
investment expenditure I and the
aggregate supply is the total production
that is either consumed or accept thus
for equilibrium
Domanick also supply imply that C plus I
could see plus S which implies
investment must be equal to saving so
for produced market equilibrium the
aggregate demand equals to aggregate
supply condition can be rewritten as the
Equality of saving and investment under
this approach we derive the is curve
using the following for panel figure
this panel shows the
inverse relationship between investment
and the rate of interest when interest
rate is higher the level of investment
is lower and when the interest rate is
low the level of investment is high the
second panel which is called panel B so
the equality between saving and
investment the 45-degree line drawn in
this panel ensures that investment
equals saving for example I 1 is equal
to s1 Knight who is equal to s2 the
third panel panel C so the saving curve
saving depends on income and as income
increases saving increases that saving
is a positive function of income that's
why it is an upward sloping function and
panel Diesel's
the derived is curve to derive the is
curve later starts with r1 interest rate
at which investment is i1 for the goods
market be in equilibrium this investment
must be equals to saving s1 and for s1
level of saving the income level must be
determined at y1 thus we get a point Z
which shows that at r1 interest rate and
y1 level of income the goods market is
in equilibrium so the point Z is a point
on is curve again consider that interest
rate falls from r1 to r2 at a lower
interest rate investment will be higher
denoted by i2 and for goods market
equilibrium the higher investment must
be masked by higher saving and
maintaining a higher saving income level
must be higher than y1 that is in income
level module y2 thus we get another
point yes at which interest rate is r2
and income level is y2 death maintains
the saving investment equality in panel
B and so this is another point of that
skaar by joining the points legacy and
ads we get a downward-sloping is curve
as shown and this panel panel D now this
is curve is always downward sloping it
is because it cannot pass to the points
like D and E the points like D and F are
the points like a and E f I mean it
cannot be vertical
it cannot be horizontal or it cannot be
upward sloping to explain this let us
consider a point e at which income level
is y one that is saving is es one only
on the other hand at Point E interest
rate is r2 and investment is I do so at
Point E saving is s one only whereas
investment is I 2 that is investment is
this month whereas saving is a small so
at Point E is saving is not equal to
investment that is saving is less than
investment it cannot maintain goods
market equilibrium
so I es curve cannot pass through GN e
because E is not a point of goods market
equilibrium in a similar way F is also
not a point of goods market equilibrium
because at Point F interested is r1 has
such investment I won only whereas at
Point EF income is y2
but as saving is s2 so saving is this
much whereas investment is this month
only
so investment is less and saving our
saving is and greater than investment at
Point E episode this is not a point of
goods market equilibrium so since E and
EF are not points of goods market
equilibrium is curve cannot be
horizontal going through the point Z and
F it cannot be vertical going through
the point F in ads and it cannot be an
upward sloping curve
going through the point e and F that is
the reason why the is car is always
downward sloping
so we can formally derived the is car
here we consider three sector economy
were total aggregate demand equal C plus
I plus Z and the goods market
equilibrium requires aggregate supply
across a Greek a demand so the
consumption is positive function of
disposable incomes equals a plus B times
y minus t y minus T is disposable income
why it's incomplete total taxes so
investment is a negative function of
interest rate I equals C minus D are the
minus sign insures that there is
negative relationship between Ayana
government expenditure is supposed click
those an answer to your mind
substituting this equal to aggregate
this into aggregate supply closet demand
condition we get the value of y as a
function of R so this is the eclipse
this is the equation of is car from
which we can derive the following
results there is a negative relationship
between r and y because the coefficient
of R has negative sign so that is why
the is curve is always negatively sloped
the government expenditure has a
positive sign so increase in government
expenditure has positively impact on is
car increase in government expenditure
Sif's the is curve of force a decrease
in government expenditure shifts the is
curve downwards the toilet axis has a
negative coefficient
it means increase in tax rate shifts the
is curve upwards
decreasing taxes increase in taxes
shifts the is curve upwards and decrease
in taxes sips the is curve downwards so
government expenditure and total taxes
are the to sift factors of the is curve
the slope of the is curve in the depends
on the value of D and B D is the slope
of the investment curve the higher the
value of D the more sensitive is the
investment to the interest set that is
the investment curve is Fletcher in such
a situation is curve will also be
platter
thus flatter the investment curve
flatter with the is curve and steeper
the investment curve and a steeper will
be Dyess curve furthermore slope of is
curved also depends on the palak
marginal propensity to consume the last
of the value of MPC the fragile Dyess
curve so in summary we can say that is
curve always loves downwards the second
result is very important result to each
point on the is curve like the point in
P like the point E so like this point
here a saving is always less than
investment we can remember this in a
very simple way by trim by remembering
that in comparison to party hats point
he has a lower income level so lower
income level means lower saving level so
saving is less and investment at Point F
which lies to the right of the is curve
in comparison to the point G income is
higher higher income means higher saving
so at Point F saving is Alou is greater
than investment so at end point to the
right of highest curve saving is greater
than investment and to any point at any
point to the left of the is curve saving
us listen enmeshment
the third important result aids the
shift factors in is curve are the fiscal
policy factors like government
expenditure and taxes increase in
government expenditure saves the is
curve outwards our workforce
whereas increasing tax shifts is curved
inwards or downwards thank you for
watching this video