For the LM curve, why do we make an assumption that as real aggregate income increases, saving increases faster than investment. Shouldn’t rising income mean that household will consume more and businesses would invest more? Thanks!
I believe that you mean for the IS curve, not the LM curve.
“Given expectations about returns on fixed investment, every level of the real interest rate (i) will generate a certain level of planned fixed investment and other interest-sensitive spending: lower interest rates encourage higher fixed investment and the like. Income is at the equilibrium level for a given interest rate when the saving that consumers and other economic participants choose to do out of this income equals investment (or, equivalently, when “leakages” from the circular flow equal “injections”). The multiplier effect of an increase in fixed investment resulting from a lower interest rate raises real GDP. This explains the downward slope of the IS curve.”
You’re welcome. I hope it helped.