... out that AD does not change very much when prices change. In the long run, consumers adjust their spending habits in response to changing prices, and then the slope of the AD curve may change. When looking at the aggregate demand curve we also have to look at the ISLM model, in particular the IS curve and how it is derived. Looking at the graph below, if interest rates are at R, investment and saving is affected by it. National income equilibrium is where I = S. if the rate of interest changes from R to R1 then it will cause a rise in investment and a fall in savings. A rise in investment would cause a shift from I to I1 and a shift in saving from S to S1. In the lower part of the diagram We can see from the graph that it gives rise a downward sloping I=S ...

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