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IS curve


The locus of combinations of interest rate, r, and national income, Y, for which ex ante savings, S, and investment, I, are equal. The equality of ex ante savings and investment is a condition of product market equilibrium in the IS-LM model of Keynesian economics. It is usually assumed that when income rises, savings rise considerably and investment changes litde. When interest rates rise, investment falls sharply while savings change little. Given these assumptions, to preserve equality between ex ante savings and ex ante investment, if Y rises r must fall; thus the IS curve slopes downwards in a diagram with Y on the horizontal axis and r on the vertical axis.


Reference: Oxford Press Dictonary of Economics, 5th edt.