Answer to Question #95977 in Macroeconomics for kkkkomal

Question

explain the relationship between the effectiveness of monetary policy and the interest elasticity of money demand. will monetary policy be more or less effective the higher the interest elasticity of money demand? explain. now explain the relationship between fiscal policy and the interest elasticity of money demand. why do the two relationships differ?

Answer 1

When money demand is interest elastic, the LM curve is flat but when monetary policy is applied it shifts to the right. This shift to right will increases income and decreases interest rate. The increase in income is insignificant and therefor in this case monetary policy is ineffective.

Facial policy and monetary policy are both used to control inflation by pursue policies of higher economic growth. The only difference between the two is that monetary policy is basically concerned with the management of interest rate and money supply while facial policy is a term used to explain the spending and tax actions of the federal government.