FIGURE 12-4
The IS* Curve The
IS* curve is derived from the net-exports schedule and the Keynesian cross. Panel (a) shows the net-exports schedule: an increase in the exchange rate from
e1 to
e2 lowers net exports from
NX(
e1) to
NX(
e2). Panel (b) shows the Keynesian cross: a decrease in net exports from
NX(
e1) to
NX(
e2) shifts the planned-expenditure schedule downward and reduces income from
Y1 to
Y2. Panel (c) shows the
IS* curve summarizing this relationship between the exchange rate and income: the higher the exchange rate, the lower the level of income.