Firms respond by hiring workers and increasing output, which moves the economy back toward the equilibrium level of output. The larger the MPC, the larger the multiplier. Therefore, with interest rates determining investment, and changes in investment expenditure determining output, the two together give us the relationship between interest rates and output. This is the IS curve, derived on p. 267. If government increases its spending, E shifts upward, pushing the IS curve to the right.
Lower taxes have the same effect.
The supply of real money balances is controlled by the central bank, so it is a vertical curve, as on p. 271. Since we want to make more transactions as our income increases, the transactions motive indicates that money demand increases with income. The precautionary demand derives from your planned expenditures in the future, and your estimated future needs for money. It is also positively related to income. It has serious theoretical problems, and it is not clear that this demand even exists.