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Which combination will produce the most powerful monetary policy (i.e., the biggest effect on investment): 1)...

Which combination will produce the most powerful monetary policy (i.e., the biggest effect on investment): 1) interest elastic money demand curve + interest elastic investment schedule; 2) interest inelastic money demand curve + interest inelastic investment schedule; 3) interest elastic money demand curve + interest inelastic investment schedule; 4) interest inelastic money demand curve + interest elastic investment schedule? Explain the basis for your answer. [The investment schedule is a “curve” that relates the amount of investment, on the horizontal axis, to the interest rate, on the vertical axis. It is downward sloping.]

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Answer #1

An interest elastic money demand curve and interest elastic investment schedule will produce the most powerful monetary policy.

An elastic money demand curve means with an increase or decrease in the interest rates the demand for the money rises more or falls more in the proportion. If the interest rate is decreased for increasing marginal efficiency of capital the money demand will increase more in proportion and this will make the monetary policy more effective.

Second, if the investment demand is elastic that means with every decrease in the interest rate the investment have wide fluctuation. If the rate decrease the investment will respond more in relation to interest.

Increased money demand and increased investment with a decrease in the interest rate will make the monetary policy more effective.  

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