Because the rise of interest rate will lead to the decrease of investment expenditure, thus reducing the total expenditure and eventually leading to the decline of the balanced income level, the IS curve is inclined downward. The slope of IS curve mainly depends on the sensitivity of investment to interest rate and the size of multiplier. The greater the elasticity of investment to interest rate, the flatter the IS curve. The larger the multiplier, the flatter the curve.
Extended data:
For two-sector economy, the equilibrium condition of product market is C+S = C+I, given S = S (y) and I = I (r), the market equilibrium condition is simply expressed as i(r)=s(y). Since investment is a function of interest rate r and savings is a function of income y, i(r)=s(y) also represents the function transfer between interest rate r and national income y under the condition of product market equilibrium:
1, the movement of the investment function, if the independent investment E increases for some reason, the investment curve moves to the upper right and IS moves to the upper right. On the contrary, e decreases and IS moves to the lower left.
2. With the movement of saving function, people's desire for saving increases. At every income level, people increase their savings, the savings curve moves to the upper left, and IS moves to the lower left. On the contrary, IS moves to the upper right.
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