Answer to Question #96436 in Macroeconomics for effectives

Question

Explain the relationship between the effectiveness of monetary policy and the interest elastic-
ity of investment. Will monetary policy be more or less effective the higher the interest elastic-
ity of investment demand? Now explain the relationship between the effectiveness of fiscal
policy and the interest elasticity of investment demand. Why do the two relationships differ?

Answer 1

Interest elasticity of investment the responsiveness of investment to a change in interest rates.

Monetary policy will be more effective the higher the interest elasticity of investment demand.

Fiscal policy will be more effective the lower the interest elasticity of investment demand.