Question

Is there any monetary policy that can increase interest rate elasticity ( positive elasticity )?

Answer 1

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Question:

Answer:

Monetary Policy:

Monetary policy is a action taken by the central banks to manage the money supply. Monetary policy classified as either expansionary or contractionary. In expansionary monetary policy central bank increase the money supply and in contractionary monetary policy central bank decrease the money supply. There are many tools that is taken in use by to the implementation of monetary policy like, changing in discount rate, buying or selling government securities in open market (OMO), changing in reserve requirement. When the central bank follow the expansionary monetary policy then the central bank reduce the discount rate and reserve requirement and buy government securities in open market (through OMO) and vice-versa.

Interest Rate Elasticity:

Interest rate elasticity is the percentage change in demand of money with the percentage change in interest rate.  We calculate the Interest rate elasticity by the proportional change in the quantity of money demanded divided by the proportional change in interest rate.

Positive  Elasticity:

Positive elasticity demand means positive change or change in the similar direction of two dependent variables. Example: We know the when the income level increase the the demand of normal goods is increased and inferior goods is decreased. So, the income elasticity of demand of normal goods is positive.

Demand of Money:

The demand of money involves the desired holding of financial assets or cash/currency or notes except the investment. People demand for money because of their economic activities like buying goods or services, for emergency requirements, other day to expenses etc.

As per the microeconomic principles the relation between the interest and demand of money is negative. It means when the interest rate increase then the demand of is decreased and vice-versa because asset demand for money is inversely related to the market interest rate. When, during the expansionary monetary policy the central bank increased the money supply that decrease the interest rate and the demand of money is increased and during the  contractionary monetary policy central bank decreased the money supply and interest rate is increased and the demand of money is decreased. So,there any monetary policy that can increase interest rate elasticity (positive elasticity).

Thank Kumar