The goods market equilibrium is shown by which curve

1.	The goods market equilibrium is shown by which curve
Answer» long answer Goods Market Equilibrium: Derivation of the IS Curve Article Shared by Subho Mukherjee Let us make in-depth study of the derivation, reasons for downward SLOPE and shift of IS curve in goods market equilibrium. Derivation of IS Curve: The IS-LM curve MODEL emphasises the interaction between the goods and MONEY markets. The goods market is in equilibrium when aggregate demand is equal to income. The aggregate demand is determined by consumption demand and investment demand. In the Keynesian model of goods market equilibrium we also now introduce the rate of interest as an important determinant of investment. With this introduction of interest as a determinant of investment, the latter now becomes an endogenous variable in the model. When the rate of interest falls the level of investment increases and vice versa. Thus, changes in the rate of interest affect aggregate demand or aggregate expenditure by causing changes in the investment demand. When the rate of interest falls, it lowers the cost of investment projects and thereby raises the profitability of investment. The businessmen will therefore undertake greater investment at a lower rate of interest. The increase in investment demand will bring about increase in aggregate demand which in turn will raise the equilibrium level of income. In the derivation of the IS curve we seek to find out the equilibrium level of national income as determined by the equilibrium in goods market by a level of investment determined by a given rate of interest. Thus IS curve relates different equilibrium levels of national income with various rates of interest. With a fall in the rate of interest, the planned investment will increase which will cause an upward shift in aggregate demand function (C + I) resulting in goods market equilibrium at a higher level of national income The lower the rate of interest, the highwill be the equilibrium level of national income. Thus, the IS curve is the LOCUS of those combinations of rate of interest and the level of national income at which goods market is in equilibrium. How the IS curve is derived is illustrated in Fig. 20.1. In PANEL (a) of Fig. 20.1 the relationship between rate of interest and planned investment is depicted by the investment demand curve II. It will be seen from panel (a) that at rate of interest Or0the planned investment is equal to OI0. With OI0 as the amount of planned investment, the aggregate demand curve is C + I0 which, as will be seen in panel (b) of Fig. 20.1 equals aggregate output at OY0 level of national income. Therefore, in the panel (c) at the bottom of the Fig. 20.1, against rate of interest Or0, level of income equal to OY0has been plotted. Now, if the rate of interest falls to Or1, the planned investment by businessmen increases from OI0 to OI1 [see panel (a)]. With this increase in planned investment, the aggregate demand curve shifts upward to the new position C + II in panel (b), and the goods market is in equilibrium at OY1 level of national income. Thus, in panel (c) at the bottom of Fig. 20.1 the level of national income OY1 is plotted against the rate of interest, Or1. With further lowering of the rate of interest to Or2, the planned investment increases to OI2 [see panel (a)]. With this further rise in planned investment the aggregate demand curve in panel (b) shifts upward to the new position C +I2 corresponding to which goods market is in equilibrium at OY2 level of income. Therefore, in panel (c) the equilibrium income OY2 is shown against the interest rate Or2. short answer The IS-LM curve model emphasises the interaction between the goods and money markets. The goods market is in equilibrium when aggregate demand is equal to income. The aggregate demand is determined by consumption demand and investment demand. *please drop some thanks*

Answer»

long answer

Goods Market Equilibrium: Derivation of the IS Curve

Article Shared by Subho Mukherjee

Let us make in-depth study of the derivation, reasons for downward SLOPE and shift of IS curve in goods market equilibrium.

Derivation of IS Curve:

The IS-LM curve MODEL emphasises the interaction between the goods and MONEY markets.

The goods market is in equilibrium when aggregate demand is equal to income. The aggregate demand is determined by consumption demand and investment demand.

In the Keynesian model of goods market equilibrium we also now introduce the rate of interest as an important determinant of investment. With this introduction of interest as a determinant of investment, the latter now becomes an endogenous variable in the model. When the rate of interest falls the level of investment increases and vice versa.

Thus, changes in the rate of interest affect aggregate demand or aggregate expenditure by causing changes in the investment demand. When the rate of interest falls, it lowers the cost of investment projects and thereby raises the profitability of investment. The businessmen will therefore undertake greater investment at a lower rate of interest.

The increase in investment demand will bring about increase in aggregate demand which in turn will raise the equilibrium level of income. In the derivation of the IS curve we seek to find out the equilibrium level of national income as determined by the equilibrium in goods market by a level of investment determined by a given rate of interest.

Thus IS curve relates different equilibrium levels of national income with various rates of interest. With a fall in the rate of interest, the planned investment will increase which will cause an upward shift in aggregate demand function (C + I) resulting in goods market equilibrium at a higher level of national income The lower the rate of interest, the highwill be the equilibrium level of national income. Thus, the IS curve is the LOCUS of those combinations of rate of interest and the level of national income at which goods market is in equilibrium. How the IS curve is derived is illustrated in Fig. 20.1. In PANEL (a) of Fig. 20.1 the relationship between rate of interest and planned investment is depicted by the investment demand curve II.

It will be seen from panel (a) that at rate of interest Or0the planned investment is equal to OI0. With OI0 as the amount of planned investment, the aggregate demand curve is C + I0 which, as will be seen in panel (b) of Fig. 20.1 equals aggregate output at OY0 level of national income. Therefore, in the panel (c) at the bottom of the Fig. 20.1, against rate of interest Or0, level of income equal to OY0has been plotted. Now, if the rate of interest falls to Or1, the planned investment by businessmen increases from OI0 to OI1 [see panel (a)].

With this increase in planned investment, the aggregate demand curve shifts upward to the new position C + II in panel (b), and the goods market is in equilibrium at OY1 level of national income. Thus, in panel (c) at the bottom of Fig. 20.1 the level of national income OY1 is plotted against the rate of interest, Or1. With further lowering of the rate of interest to Or2, the planned investment increases to OI2 [see panel (a)].

With this further rise in planned investment the aggregate demand curve in panel (b) shifts upward to the new position C +I2 corresponding to which goods market is in equilibrium at OY2 level of income. Therefore, in panel (c) the equilibrium income OY2 is shown against the interest rate Or2.

short answer

The IS-LM curve model emphasises the interaction between the goods and money markets. The goods market is in equilibrium when aggregate demand is equal to income. The aggregate demand is determined by consumption demand and investment demand.