Investment-Saving Curve and Related Concepts (Vocabulary Flashcards)

Vocabulary flashcards covering key terms and definitions from the IS curve lecture notes.

IS curve

A graphical representation of all combinations of output (Y) and real interest rate (r) where planned investment equals planned saving; shows the negative r–Y relationship in the short run and shifts with monetary/ fiscal changes.

Investment (I)

Planned spending by firms on capital; on the IS curve, I changes with the real interest rate and MPK, and must balance saving.

Saving (S)

Planned household/sector saving; on the IS curve, I = S at equilibrium.

Real interest rate (r)

Interest rate adjusted for inflation; affects borrowing costs and firms’ investment decisions.

Potential output (Ỹ, Y-bar)

The long-run sustainable level of output when resources are fully utilized; often exogenously specified in the short-run model.

Marginal Product of Capital (MPK, r̄)

Additional output produced by one more unit of capital; used as the benchmark equilibrium real rate in investment decisions.

Equilibrium real interest rate (r̄)

The real interest rate that equates desired saving and desired investment via MPK in the model.

R_t (actual real interest rate)

The realized real interest rate in the economy, influenced by monetary policy.

b̄ (beta-bar)

Parameter measuring how responsive investment is to changes in the real interest rate.

Gap (R_t − r̄)

Difference between the actual real rate and the equilibrium MPK; drives the magnitude of investment responses.

Aggregate Demand Shock

A sudden, economy-wide change in demand for goods and services that shifts the IS curve.

Positive Aggregate Demand Shock

A surprise increase in overall demand that raises output and shifts the IS curve to the right.

Negative Aggregate Demand Shock

A surprise decrease in overall demand that lowers output and shifts the IS curve to the left.

Export Demand Shock

A shock to foreign demand for a country’s exports, affecting net exports and IS position.

Financial Market Shock

Shocks in housing or financial markets that impact consumption and investment, shifting the IS curve.

Open Market Operations (OMO)

Central bank actions (buying/selling government securities) to influence money supply and rates.

Forward Guidance

Central bank communications about future policy actions to influence expectations and behavior.

Macroprudential Measures

Regulatory tools aimed at reducing systemic financial risk (e.g., tighter lending standards).

Currency Intervention

Central bank purchase/sale of foreign currency to influence exchange rates and trade dynamics.

Multiplier Effect

The process by which an initial autonomous expenditure change leads to a larger final increase in output, shifting the IS curve.

Government Purchases (G)

Expenditures by the government on goods and services; can act as a shock or policy instrument.

Automatic Stabilizers

Policy features (e.g., unemployment benefits) that automatically dampen recessions without new legislation.

Ricardian Equivalence

Tax timing does not affect current economic activity because consumers save to pay future taxes when deficits are financed by borrowing.

Permanent Income Hypothesis (PIH)

Consumption depends on expected long-term average income, not just current income.

Life-Cycle Model (LC)

Consumption based on lifetime income, smoothing consumption over time as people age.

No-Free-Lunch Principle

Spending today must be financed later; higher today’s spending implies future taxes or reduced spending.

Net Exports (EX − IM)

Exports minus imports; part of aggregate demand that affects the IS curve via the trade balance.

National Income Accounting Identity

Y = C + I + G + EX − IM; equality of different ways to measure a country’s output.