Question
In: Economics
Explain the effectiveness of monetary and fiscal policy when: The interest elasticity of money demand is...
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Explain the effectiveness of monetary and fiscal policy when:
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The interest elasticity of money demand is high.
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The interest elasticity of investment is low.
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Solutions
Expert Solution
The proportional change in the quantity of money demanded divided by the proportional change in interest rate is interest elasticity of money demand.
A. Interest elasticity of money demand is high:-In case of high elasticity of money dad the monetay policy is less effective. i.e. higher the interest elasticity of money demand the less effective is monetary policy . On the other hand higher interest elasticity of money demand higher will be the effectiveness of fiscal policy.
B. Interest elasticity of money demand is low. :in case of low elasticity of money demand the effectiveness of monetary policy is high i.e.lowere the electricity of money demand more will the effectiveness of Monetary policy. Lower interest elasticity of money demand lower will be the effectiveness of fiscal policy.
Rahul Sunny answered 1 year agoRelated Solutions
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