Answer to Question #142885 in Macroeconomics for John

Question

How do we transition from the Keynesian cross model to the IS curve model? How are
the two connected? Explain.

Answer 1

The IS curve is derived from the simple Keynesian cross model.

It is assumed that consumer behavior is described by the consumption function:

$$Y=C_a+MPC(Y-T)$$

where Ca is autonomous consumption, which does not depend on income; Y - output (consumer income) in the economy; T - net taxes (taxes net of subsidies); MPC (0,1) - marginal propensity to consume. So (Y-T) is disposable income.