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330 • MacroeconomicsFigure 17.4 • The IS-LM model.■ Exogenous Changes in IS and LMFirst let’s look at some exogenous changes, those that are basically independentof fiscal and monetary policy and therefore outside the IS-LMmodel. Consider an increase in the marginal propensity to save. Such achange in savings rate might result from fears of an economic downturnthat would lead to lower wages and greater unemployment. (We mighthope that people might one day simply decide to consume less in orderto protect the environment.) In either case, people decide to save moreand spend less of their disposable income. This means that now S > I forall the combinations of r and Y on the IS curve. We need a new IS curvefor which S = I again. If people save more at every r, this means S > I, orleakage greater than injection, so the flow of income will fall to the levelat which S = I again. How does this happen? Of course, if the marginalpropensity to save increases, then the marginal propensity to consumemust decrease. As people consume less, businesses will be unable to selltheir goods, leading to unplanned accumulations of inventory. This inturn will lead businesses to reduce planned investment and production—perhaps laying people off. Unemployment resulting from layoffs furtherdecreases consumption, requiring another round of adjustment, loweringY still more. At the same time, an increase in the supply of money due tohigher savings and a decrease in the demand for money due to lower investmentdrives down the costs of money, that is, the interest rate (whichmay ameliorate to some extent the decline in investment). When the dy-