Savings And Investment Curve

The is curve will be vertical if investment is absolutely interest inelastic. Its slope depends on the saving function and investment function.

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The investment demand curve.

Savings and investment curve. It will be seen from the fig. We see therefore that according to the is lm curve model both the real factors namely saving and investment productiv ity of capital and propensity to consume and save and the monetary factors that is the demand for money liquidity preference and supply of money play a part in the joint determination of the rate of interest and the level of income. The steepness of the curve depends on the interest elasticity of investment i e how sensitive investment spending is to changes in the interest rate as.

Investment curve ii is drawn as horizontal straight line because following keynes it has been assumed that investment is independent of the level of income i e it depends upon factors other than the current level of income. Since points on the is curve represent points where aggregate demand is equal to aggregate supply any factor that increases the demand for goods and services will shift the is curve up and to the right and any factor that decreases the demand for goods and services will shift the is curve down and to the left. Investment does not mean buying stocks or bonds.

The is curve also represents the equilibria where total private investment equals total saving with saving equal to consumer saving plus government saving the budget surplus plus foreign saving the trade surplus. Saving takes place when people abstain from consumption that is when they consume less than their income. Ii is the investment curve.

Economists use a schedule called the demand. Here are some important facts. The is curve slopes downwards to the right.

From the savings investment diagram it follows that any shift of the savings or investment curve that increases the real interest rate holding y fixed will shift up the is curve. The is lm model which stands for investment savings is and liquidity preference money supply lm is a keynesian macroeconomic model that shows how the market for economic goods is. Or it has a negative slope.

In analyzing the determinants of investment we focus particularly on the relationship between interest rates and investment is crucial because interest rates influenced by central banks are the major instrument by which governments influence investment to show the relationship between interest rates and investment. The is curve represents the locus where total spending consumer spending planned private investment government purchases net exports equals total output real income y or gdp. 8 5 that saving and investment curves intersect at point e.

A bond is a fixed income investment in which an investor loans money to an entity corporate or governmental that borrows the funds for a defined period of time at a fixed interest rate. Investment takes place when we purchase new capital equipment or other assets that make for future productivity. The is curve will be relatively steep flat if investment is less more sensitive to interest rate changes.

The is curve is negatively sloped because a high er level of the interest rate reduces investment spend ing thereby reducing aggregate demand and thus the equilibrium level of income.

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