The IS curve describes equilibrium in the market for goods and services in terms of r and Y

The IS curve describes equilibrium in the market for goods and services in terms of r and Y

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The IS curve describes equilibrium in the market for goods and services in terms of r  and Y. The IS curve is downward sloping because as the interest rate falls, investment  increases, thus increasing output. The LM curve describes equilibrium in the market for  money. The LM curve is upward sloping because higher income results in higher  demand for money, thus resulting in higher interest rates. The intersection of the IS  curve with the LM curve shows the equilibrium interest rate and price level.  The IS curve and the LM curve shift in response to economic activities. The IS curve  shifts outward as a result of increased government purchases, exogenous increases in  investment, decreases in taxes, and exogenous increases in consumption. The IS curve  shifts inward as a result of decreases in government purchases, exogenous decreases  in investment, increases in taxes, and exogenous decreases in consumption. The LM 
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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