... schedule is derived by first drawing a normal graph of aggregate demand, as shown below. We know that a change in interest rates will affect the height of the aggregate demand curve, since interest rates affect investment. With a lower rate of interest, the aggregate demand schedule will be higher, and with a higher rate of interest the aggregate demand schedule will be lower. Knowing this, it is possible to plot an aggregate demand curve for any given rate of interest, and show the different equilibrium points. Several aggregate demand curves are shown on the graph below. Since we know the rate of interest which produced the aggregate demands curves AD0, AD1 and AD2, we also know the rates of interest which produced the incomes E0, E1 and E2. We can therefore plot rates of interest against income, which will give us the IS schedule shown below. The ...

See this essay or coursework document in full right now