Answer to Question #222626 in English for Soni

Question

Explain the role of sensitiveness of investment to any given change in the rate of interest (b) on the size of Fiscal Policy Multiplier with the help of a diagram. Explain the economics behind it in detail.

Answer 1

ed-income securities and interest rates are inversely correlated. Therefore, as interest rates rise, prices of fixed-income securities tend to fall. When applied to calculate fixed income securities, interest rate sensitivity is known as the asset's duration. This is one way to determine how interest rates affect a fixed-income security portfolio. The higher a bond or bond fund's duration, the more sensitive the bond or bond fund is to changes in interest rates.

The duration of fixed-income securities gives investors an idea of the sensitivity to potential interest rate changes. Duration is a good measure of interest rate sensitivity because the calculation includes multiple bond characteristics, such as coupon payments and maturity.

When setting fiscal policy, the government can take an active role in changing its spending or the level of taxation. These actions lead to an increase or decrease in aggregate demand, which is reflected in the shift of the aggregate demand (AD) curve to the right or left respectively.