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Unformatted text preview: UNIVERSITY OF CALIFORNIA, BERKELEY Dorian Carloni Department of Economics ECON 100B, Fall 2011 SECTION 13: The IS Curve 13.1. Derivation of the IS curve & The IS curve is the inverse relationship between aggregate output and the real interest rate when the goods market is in equilibrium, & Goods market equilibrium exists only when planned spending exactly equals the amount that is actually produced (in other words the aggregate demand equals the aggregate supply of goods): Y = Y pe Y = C + I p + G + NX where: 1. Actual expenditures, Y , are the total amount of spending on domestically produced goods and services that households, businesses, the government, and foreigners actually make 2. Planned expenditures , Y pe , are the total amount of spending on domestically produced goods and serves that households, businesses, the government, and foreigners want to make & Planned expenditures, Y pe , include: 1. Consumption expenditures , C (durable goods spending + non-durable goods spending + services spending): C = C + mpc Y D c r where: C = autonomous consumption expenditure (consumer con&dence or sentiment (+), household wealth (+), and expected future income (+))...
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