Answer to Question #95982 in Macroeconomics for kkomal

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

in accordance with the Keynesian monetary policy transfer mechanism, an increase in the nominal money supply at a constant price level will lead to a fall in the equilibrium nominal interest rate and an increase in the equilibrium level of real income. A reduction in the nominal money supply at a constant price level, respectively, will cause an increase in the equilibrium nominal interest rate and a decrease in the equilibrium level of real income.

A reduction in the nominal money supply at a constant price level, respectively, will cause an increase in the equilibrium nominal interest rate and a decrease in the equilibrium level of real income. The impact on real income will be greater when the demand for money is less dependent on changes in interest rates, so that the LM schedule will be more steep. When the expected investments have greater percent elasticity, the LM chart will be more gentle