Chapter 20 econ.docx - Chapter 20 The IS Curve The IS curve is a graphical component of a traditional model used to illustrate business cycles and the

Chapter 20 econ.docx - Chapter 20 The IS Curve The IS curve...

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Chapter 20- The IS Curve The IS curve is a graphical component of a traditional model used to illustrate business cycles and the effect of the government It is based on the notion that the current level of output is equal to the level at which there is just enough overall demand to purchase that level of output Output is broadly divided into 4 categories: Y= C+I+G+Xn Therefore aggregate demand can be considered to be the sum of the individual demands for these categories of goods and services Consumption consumption by households, effect of current after tax or disposable income (Y-T) o Higher disposable income is assumed to lead to higher consumption Investment Spending “fixed investment”: spending by firms on equipment and machinery as well as spending by firms and households on new structures o Inventory investment is included in the same category o When inventories are low, firms may produce more cars than they
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