investment - given as stock variable in simplest cases
- I = I(Y,i)
- increases w/ sales (Y), but decreases as interest (i) increases
- higher interest >> costs more to borrow >> less investing
- even though money demand decreases as interest increases
- bonds not the same as investments
IS relation - same as former demand function but w/ I as a function
- Y = C(Y-T) + I(Y,i) + G
- again, applies to a closed economy
- shows relationship between interest rate and equilibrium in goods market
- interest rate reduction >> investment increases
- investment increases >> demand (Z) increases >> Y increases further through multiplier effect
- changes in interest, production don't cause shifts, only make mov'ts along curve
- remember that investment is now a function of interest and output, no longer exogenous
- in market goods equilibrium, interest rates cause shifts in production curve
- for IS curve, relates output to interest rate by plotting equilibria of goods market at different interest rates
- w/ substitution, changes in demand Z causes shifts in IS curve
- by relation, changes in G, T (fiscal policy) shifts IS curve
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