Question #221223

With the aid of a diagrams, briefly explain how interest elasticities and demand for money affect the slope of the IS and the LM curve.


Expert's answer

The lower the interest elasticity of the demand for money the steeper the LM curve as shown below.


When interest elasticity of demand for money is higher the LM curve is relatively flat as shown below.


When interest elasticity of investment is high the IS curve slopes steeply as shown below.

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