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