The equilibrium in the goods market is represented by the IS curve. The IS curve is a graphic representation of the goods market equilibrium showing the different combinations of the output levels and the interest rates at which planned spending is equal to income.
The derivation of the IS curve can be done in two stages;
Stage 1: The Investment Demand Curve
In the earlier chapters, investment has been assumed to be exogenous. However as the interest rate is being introduced in our analysis, investment is now taken as endogenous.
Investment is expenditure on the additions to the firm’s capital in the form ...