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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Show graphically that the more interest insensitive the investment demand curve is, the less likely it is that monetary policy will be effective at changing Real GDP.

To determine

Effects of monetary policy in insensitive investment demand curve.

Explanation

If investment demand is relatively sensitive, the monetary policy is effective because when the government takes a monetary expansion policy through increase in money supply, the rate of interest will decline and it will lead to an increase in the quantity demanded. It is shown in the figure 1.

If demand is relatively insensitive, the demand curve is very close to the axis of interest rate as shown in the figure 2...

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