Understanding the IS Curve Dynamics

For any level of output, the IS curve shows the value of the real interest rate

that clears the goods market. The IS curve slopes downward because higher output leads

to more desired saving and thus a lower goods-market-clearing real interest rate. For constant output,

any change that reduces desired national saving relative to desired investment increases

the real interest rate that clears the goods market and shifts the IS curve up and to

the right. Equivalently, for constant output, any change that increases the aggregate

demand for goods increases the real interest rate that clears the goods market and shifts

the IS curve up and to the right.