IS curve

The IS curve is the “investment-savings” curve, and one of two main curves on the macroeconomic IS-LM model. The IS-LM model is part of Keynesian economics (in vogue).

The IS-LM model has two curves: one IS (investment-savings) and one LM (liquidity preference-money supply). The IS curve is downward sloping, like a demand curve on your typical supply and demand graph, and the LM curve is upward sloping, like the supply curve on a consumer S&D graph. The y-axis is “interest rate” and the x-axis is “investment.”

The IS curve descends because the higher the interest rate, the less firms will be investing. The farther you move down (and to the right) on the IS curve, the lower interest rates are, and the higher capital spending is for firms.

But the IS curve also represents something else...well, rather, everyone else (consumers and the government). Part of this macroeconomic theory is that the firm’s “I” is also the country’s “S,” which is consumer saving plus government saving (surplus only) plus foreign saving (trade surplus). Like firms, consumers and the government are incentivized to save more and spend less when interest rates are high. Since I = S, both of these are represented by the downward-sloping IS curve.

The IS-LM model is used by macroeconomists to analyze the big picture...like trying to explain changes in aggregate demand and national income. Yep, the really big picture, all in one graph.