The IS curve can also be derived from the (hopefully now familiar) loanable funds model from chapter 3.
A decrease in income from Y1 to Y2 causes a fall in national saving. (Recall, S = Y-C-G)
The fall in saving causes a reduction in the supply of loanable funds. The interest rate must rise to restore equilibrium to the loanable funds market.
Now we can see where the IS curve gets its name:
When the loanable funds market is in equilibrium, investment = saving. The IS curve shows all combinations of r and Y such that investment (I) equals saving (S). Hence, “IS curve.”