 the IS-curve equilibrium in the goods market. The students, we are talking about ISLM framework. In the last lesson, we drew the labour market in this framework, we drew the FE line, we understood it. And today, we will see the goods market in this framework, how we will represent the goods market. So, IS-curve will represent the equilibrium of goods market. We know about goods market that it will be clear. By the way, any market is clear when demand and supply are equal. So, when aggregate demand and aggregate supply of goods market are equal, it will be clear. But we can also say this in another way, that when the desired investment is equal to the desired national saving, it will clear the goods market. So, adjustment in the real interest rate brings equilibrium in the goods market. So, desired national saving and desired investment brings equality in the goods market. Who brings equality? The real interest rate is equal to these two. So, for any level of output Y, the IS-curve shows the real interest rate R for which the goods market is in equilibrium. Now, we will draw it also. So, IS-curve, what will it show? IS-curve Y, that is output, and the real interest rate of those pairs will be made clear by the goods market. So, we will derivation of IS-curve. With the aggregate demand and supply, we will draw it with the equality of national saving and investment. Okay. So, on the left hand side of the panel, you can see that on the horizontal axis, we are taking the desired national saving, ST and desired investment. And on the vertical axis, we are taking the real interest rate. And on the right hand side, we have told that we want to discuss all the markets in the space of Y and R. So, from this, we will talk about the goods market equilibrium, and then we will transform it into the space of Y and R. Okay. So, you have this curve on the investment curve. We know that the investment has a negative relationship with its interest rate. When the interest rate increases, then the user's cost of capital increases, the desired capital stock decreases, and the investment increases, and vice versa. So, there is a negative relationship between the real interest rate and the investment. We have drawn this curve. It is a positive slope curve. It is a saving curve. Okay. One of the positive slopes is that when the interest rate increases, it is more beneficial for people to save. There is more attraction. Because you are getting more rewards for saving. So, the saving curve is the positive slope. An increase in the interest rate will increase the saving. But you know that the saving is related to the interest rate, and the saving is related to the income. Even the income increases, the saving increases. Since we are working in this two-dimensional space, where we have only two axes and two variables, we are taking a saving curve and we are taking a real interest rate on the other. So, the third variable is the income. We cannot take it in two-dimensional space. So, we are constantly assuming it. So, we have drawn the saving curve of the positive slope. We are assuming that the income is somewhere constant. The income level is 4000. This is the saving curve. So, the intersection between saving and investment will clear your goods market. And where is the intersection? At point D is the intersection. What is the situation on D? Suppose that the interest rate on D is 7%. And in this right space, we have combined the interest rate of 7% with the income of 4000. For example, we have the D point on the intersection. We have denoted it from D. What is D on the left side? Investment and the equality of saving. D is coming. And when we transform it in that space in which we have Y on the x-axis and R on the vertical axis, then when we join the 7% interest rate with the income of 4000, then you will get the D point. That is the pair of Y and the interest rate. The income and the interest rate is the pair on which our goods market is cleared in equilibrium. Okay. So, look at this curve. What is this? The right world shift has shifted. Why has it shifted? That is why we assume that the income is 5000 instead of 4000. What will happen then? Any interest rate, that is 7% interest rate, according to this curve, the same interest rate is due to an increased income. Now, we are saving more. So, the same interest rate is due to an increased income. Okay. Now, due to an increased income, the right world shift has shifted. Now, the intersection point, D is not clearing the goods market. The interest rate of D is 7%. On that, the situation is that the saving is too much. And obviously, the investment is 7% interest rate. In the market of loanable funds, there are more people who pay the loan. On the 7% interest rate, there are more people who want to pay the loan, but the investors who want to pay the loan are less. So, what will happen then? Whenever there is an increase in the supply of some share, its demand decreases, its price decreases. So, the price of loanable funds is of interest rate. So, the interest rate has to be less in this way. And the equilibrium point will come to F. On the F, the new saving curve and the investment curve will intersect with each other. So, this will be the new equilibrium point. What is the new equilibrium point? The interest rate has decreased from 7%. We assume that the interest rate has decreased from 5%. So, the lower interest rate has decreased due to an increased income of 4,000 to 5,000. So, in this space, when we join this 5% interest rate with 5,000 income, then you will get F point. So, in the right side diagram of D and F point, we join them. So, this curve is known as IS curve. IS curve means, that this is the curve in which we have created Y and Interest rate. Because we have told all the markets that we want to simultaneously discuss labour market, goods market and assets market in the space of Y and R. So, here we have the equilibrium of goods market in the left panel. We have the equilibrium of goods market in the space of R, saving and investment. So, now we have transformed it into R and Y in the space of R and Y. And this IS curve which you have D and F point, if you join it, you have the IS curve. This is a negatively sloped curve. And what does this curve tell? This curve tells that these are the pairs of Y and R on which your goods market is cleared. That is, at every point of this curve, your goods market is cleared. Investment, goods market is cleared. What does it mean to be cleared? That at every point of this curve, investment and saving are equal. Okay. So, let's summarize this once again. Let's see what are the features. The saving curve slopes upward because our higher real interest rate increases the saving. I have explained these things in the diagrams. I have written them here again. Quickly we will go through it. Why are the saving curves positively sloped? Because in real interest rate, people will save more and increasing output will shift the saving curve. That is, in interest rate, changes will come, and you will move along the saving curve. And when income changes, this will shift your saving curve. Higher income will shift it rightward and vice versa. The investment curve slopes downward. We have made the investment curve sloped because there is a negative relationship of investment curve and interest rate. So, we have taken two different output levels of 4000 and 5000. At the higher level of output, the saving curve is shifted to the right compared to the situation at the lower level of output. Since the investment curve is downward sloping, okay, so equilibrium at the higher level of output has a lower interest rate. The investment curve is negatively sloped. What will happen in the interest rate to shift the saving curve? So, the higher level of output must lead to a lower real interest rate. So, the IS curve slopes downward. The IS curve shows the relationship between the real interest rate and the output for which investment equals saving. That is, IS curve is equal to investment and saving and goods market demand and supply. So, another alternative interpretation of goods market is that suppose we are starting at an equilibrium point and a real interest rate is raised. There is a point where goods market is clear about the real interest rate. If there is an increase then what will happen? In real interest rate this will cause people to increase saving. If there is an increase in interest rate then people will save more. This means that people will reduce the consumption. Right? If there is a reduction in consumption then the increase in interest rate will also reduce the investment. So, the total demand in goods market is the same component. Condemption is a major component of demand and investment. If there is an increase in interest rate then both the components will reduce which means that the aggregate demand in goods market is reduced. So, the number of goods demanded declines. So, the number of goods suppliers would have to decline. So, higher real interest rate are associated with lower output i.e. the IS curve slopes downward. So, today we have derived the IS curve and discussed it. What is the IS curve? As we discussed in the first line we are developing a framework in the space of Y and R and the IS curve is the equilibrium of the Y and R pairs. Thank you very much.