IS Curve: Definition, Equation, and Significance in Macroeconomics

The IS curve, short for 'Investment-Saving' curve, depicts the equilibrium relationship between investment and saving at different interest rate levels. The general expression for the IS curve is:

Y = C + I(r) + G + NX

Where:

• Y represents national income (or output level)
• C denotes consumption expenditure
• I(r) indicates investment's dependence on the interest rate, r
• G stands for government expenditure
• NX represents net exports

The fundamental assumption underlying the IS curve is that, keeping other variables constant, there exists an inverse relationship between national income and the interest rate. This implies that an increase in national income leads to a decrease in investment demand, consequently causing the interest rate to fall.

It's crucial to note that the IS curve only represents the short-term equilibrium between saving and investment. It does not encompass the long-term equilibrium between supply and demand. In macroeconomic models, the IS curve is typically used in conjunction with other curves, such as the LM curve, to analyze the interplay between national income, interest rates, and the money supply.