FIGURE 10-7
Deriving the IS Curve Panel (a) shows the investment function: an increase in the interest rate from
r1 to
r2 reduces planned investment from
I(
r1) to
I(
r2). Panel (b) shows the Keynesian cross: a decrease in planned investment from
I(
r1) to
I(
r2) shifts the planned-expenditure function downward and thereby reduces income from
Y1 to
Y2. Panel (c) shows the
IS curve summarizing this relationship between the interest rate and income: the higher the interest rate, the lower the level of income.