Explain how the interest sensitivity of investment and interest sensitivity of money demand impacts the efficacy...

Explain how the interest sensitivity of investment and interest sensitivity of money demand impacts the efficacy of monetary and fiscal policy.

Expert Solution

The impact of monetary and fiscal policy in an economy depends to a great extent on the elasticity of investment to changes in the rate of interest and also interest sensitivity of money demand. This is because it determines the extent to which changes in the rate of interest will have an impact on investment demand and money demand in the economy. The greater the interest sensitivity of investment demand, the greater the impact of changes in the rate of interest on the investment demand and greater will be the speed with which the economy recovers. The lower the interest sensitivity of investment demand lower will be the impact of interest rate on investment demand and thus aggregate demand will change by a small amount.

On the other hand, interest sensitivity of money demand also impacts the monetary and fiscal policy in the economy. As interest sensitivity of moey demand increases, increase in interest rate will lead to fall in money demand by a greater amount and thus impact aggregate demand by a greater amount. On the other hand lower elasticity reduces the effectivess of fiscal amd monetary policy in the economy.

Rahul Sunny answered 2 years ago

Explain in words how investment multiplier and the interest sensitivity of aggregate demand affect the slope...

Explain in words how investment multiplier and the interest sensitivity of aggregate demand affect the slope of the IS curve.

9. Elasticity of Demand is designed to show sensitivity of the demand curve. Explain how it...

9. Elasticity of Demand is designed to show sensitivity of the demand curve. Explain how it works and why it can be used as a cross industry comparative tool. What does it mean if an elasticity is greater than 1?

(a) Which interest rate (nominal or real) affects investment? Which affects money demand?

Answer the following questions about interest rates and present values: (a) Which interest rate (nominal or real) affects investment? Which affects money demand? How do changes in the relevant interest rate affect these variables? (b) A restaurant is considering remodeling. It estimates the remodel will cost $6,000 and as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year and have no effect in subsequent years. If the interest rate is 5%,...

Explain the term Survivorship Bias and how it impacts the evaluation of the investment returns of...

Explain the term Survivorship Bias and how it impacts the evaluation of the investment returns of a group of portfolios.

Explain why people demand for money and how demand for money would have been influenced by...

Explain why people demand for money and how demand for money would have been influenced by Covid-19 epidemic?

how are interest rates related to investment and invrstment to aggregate demand

Using the money demand and money supply curves, explain how the money market explains the relationship...

Using the money demand and money supply curves, explain how the money market explains the relationship between interest rates and price levels as discussed in the interest rate effect (shape of AD).

Explain the effectiveness of monetary and fiscal policy when: The interest elasticity of money demand is...

Explain the effectiveness of monetary and fiscal policy when: The interest elasticity of money demand is high. The interest elasticity of investment is low.

1) Explain carefully the Keynesian theory of investment. 2) Explain the quantity theory of money demand...

1) Explain carefully the Keynesian theory of investment. 2) Explain the quantity theory of money demand and discuss its main hypotheses.

Explain how interest rates affect the level of investment demand in an economy (Think about nominal/real...

Explain how interest rates affect the level of investment demand in an economy (Think about nominal/real rates, anticipated and unanticipated inflation).

Question