Chapter 21
The IS Curve
This chapter introduces the basic concept of aggregate demand and develops one of the key
building blocks of the AD/AS model, the IS curve. The framework here is pretty conventional,
first outlining the components of planned expenditure—consumption expenditure, planned
investment spending, government purchases, and net exports. Then the chapter goes into detail
about goods market equilibrium, when planned equals actual expenditure, and shows how this
equilibrium generates the IS curve, the relationship between the real interest rate and equilibrium
output. Spending a fair amount of time in class on the concept of goods market equilibrium, and
why the economy will gravitate to this equilibrium, is worthwhile because this concept is so
important to short-run macroeconomic analysis.
The chapter then goes on to provide a deeper understanding of the IS curve by explaining the
intuition behind it, using a numerical example to explain it with mathematics Then the chapter
takes the student through all the factors that shift the IS curve and explains the intuition for how
each factor shifts the IS curve. The application of the Vietnam War buildup from 1964 to 1969
and its effect on the economy shows that the IS curve analysis is a useful one for explaining
interesting historical episodes (and the Vietnam War period is one close to my heart because it
had such a big impact on my generation). Discussion of the application on the fiscal stimulus
package of 2009 also shows students that the analysis in this chapter is useful for understanding
more recent events.