Answer to Question #153928 in Macroeconomics for Suga

Question

By using the IS-LM model, if the demand for money is sensitive to interest rates and investments are not sensitive to interest rates. Monetary policy is more effective than fiscal policy. Right or wrong? Prove it

Answer 1

Since the model includes a new endogenous variable - the interest rate - we will consider it in more detail. Interest rate and offline expenses. For savers, the interest rate acts as a reward for abstaining from consumption in the present at the expense of expected consumption in the future. For borrowers, the interest rate is the price of the borrowed funds used by investors to buy investment goods, and by households to buy consumer durables. There are many specific types of interest rates in the economy, such as interest rates paid:

 

banks on checking, savings and time accounts;

on funds borrowed by the government (interest on government bonds),

business (interest on commercial securities and corporate bonds),

commercial banks to the central bank (discount rate),

households (interest on mortgages, mortgage, and consumer loans).

The aggregate investment demand curve (left figure) reflects this inverse relationship between the amount of demand for investment and the interest rate.

A shift in the curve of total investment costs occurs when the value of autonomous investments (I) changes: their increase shifts the curve to the right, and their reduction - to the left. As a rule, Keynesian representatives associate these changes with investor sentiment, pessimistic, or optimistic assessment of the expected profitability of investment costs.

The slope of the curve of total investment costs is due to the value of the coefficient d; the higher it is, i.e. the more sensitive investments are to changes in the interest rate, the more flat curve I: even minor changes in the interest rate lead to significant changes in the value of investment demand.