Increase in government spending → demand rises → IS curve shifts rightIncrease in taxes or drop in consumer confidence → demand falls → IS curve shifts leftShifts reflect changes in fiscal policy or other non-interest-rate demand factors.

What Shifts the IS Curve?

The IS curve represents the equilibrium in the goods market — where total output equals total demand.It shows all combinations of interest rates and real GDP where investment equals saving.“IS” = Investment = Saving → the core balance behind the curve.

What Is The IS-Curve?

Lower interest rates → investment increases (borrowing is cheaper) → total demand rises → higher output.Higher interest rates → investment decreases → demand falls → lower output.That’s why the IS curve slopes downward: there's an inverse relationship between interest rate and output.

The Logic Behind It:

"You can’t invest without saving — and you can’t grow without investing."

"Saving is the engine’s fuel tank. Investment is the engine itself."

The IS curve shows how fiscal tools like taxes or government spending interact with interest rates.It’s the first step in seeing how policy choices influence national output.In the full IS-LM model, the IS curve interacts with the LM curve to determine both interest rates and GDP.

Why It Matters?

Total demand = Consumption + Investment + Government Spending + Net Exports (C + I + G + NX)The IS curve focuses especially on interest-sensitive components like investment and sometimes consumption.The idea: output adjusts to match demand — that’s equilibrium.

What's Holding Demand Together?

The IS curve helps us understand how the real economy responds to interest rates and fiscal policy.It sets the stage for analyzing policy effects, recessions, and recovery — by showing the balance between spending and output.

Key Takeaways:

In this post, I want to give you a first introduction into the goods market, presented through the IS-Curve. In future posts, I will conclude this rather simple and abstract model into the bigger picture. I hope this may help to understand economics a bit better in an easy way.

SIMPLE SUMMARY OF THE IS RELATIONSHIP

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