Editing IS–LM model (section)

===IS (investment–saving) curve===
[[File:I-S and Y=AD to IS NT Wiki.png|class=skin-invert-image|thumb|IS curve represented by equilibrium in the capital market and Keynesian cross diagram.]]
The IS curve shows the causation from interest rates to planned investment to national income and output.

For the investment–saving curve, the [[independent variable]] is the interest rate and the [[dependent variable]] is the level of income. The IS curve is drawn as downward-[[slope|sloping]] with the interest rate ''r'' on the vertical axis and GDP (gross domestic product: ''Y'') on the horizontal axis. The IS curve represents the [[Locus (mathematics)|locus]] where total spending ([[consumer spending]] + planned private investment + government purchases + net exports) equals total output (real income, ''Y'', or GDP).

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). The level of real GDP (Y) is determined along this line for each [[interest rate]]. Every level of the real interest rate will generate a certain level of investment and spending: lower interest rates encourage higher investment and more spending. The [[multiplier effect]] of an increase in fixed investment resulting from a lower interest rate raises real GDP. This explains the downward slope of the IS curve. In summary, the IS curve shows the causation from interest rates to planned fixed investment to rising national income and output.

The IS curve is defined by the equation
:<math>Y = C \left({Y}-{T(Y)}\right) + I \left({r}\right) + G + NX(Y),</math>
where ''Y'' represents income, <math>C(Y-T(Y))</math> represents consumer spending increasing as a function of disposable income (income, ''Y'', minus taxes, ''T''(''Y''), which themselves depend positively on income), <math>I(r)</math> represents business investment decreasing as a function of the real interest rate, ''G'' represents government spending, and ''NX''(''Y'') represents net exports (exports minus imports) decreasing as a function of income (decreasing because imports are an increasing function of income).