Shift of the IS Curve II

A shift of the IS curve happens when any factor changes aggregate demand at every given interest rate. The IS curve can also shift when people’s confidence and business expectations change.

First, consider households. Consumer confidence—how people feel about their future jobs and income—is crucial. If confidence is high, households spend more, increasing autonomous consumption even if the interest rate is unchanged.

For example, people might buy a new car, which raises aggregate demand and shifts the IS curve to the right. On the other hand, if people worry about a recession, they may spend less and save more, lowering aggregate demand and shifting the IS curve to the left.

Second, consider firms. Their expectation of future profits is called business sentiment. If business sentiment is positive, firms invest more, perhaps by building a new factory. This new spending raises aggregate demand, shifting the IS curve right.

But if firms are pessimistic about the future, they reduce their investment. This fall in spending lowers aggregate demand, shifting the IS curve left.