The Keynesian cross is a stepping-stone on our path to the IS-LM model. It is useful because it shows how the spending plans of households, firms and the government determine the economy's income. Yet, we have assumed that the level of planned investment $I$ is fixed. We now relax this assumption in our model by introducing a relationship between the interest rate and planned investment:

$I = I(r)$

Because the interest rate is the cost of borrowing to finance investment projects, an increase in the interest rate reduces planned investment. As a result, the investment function slopes downward.

$r$

1.00
0.2511.75