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5. Illustrate through the Ap demand schedule the following: assume that the Fed raises interest rates...

5. Illustrate through the Ap demand schedule the following: assume that the Fed raises interest rates by one-quarter percent and the level of Ap spending falls by a substantial amount. Would the Ap demand function be relatively steep or flat? Explain?

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If the level of Ap spending falls by a substantial amount by one quarter percent increase in interest rates then Ap demand function would be relatively flatter because the interest elasticity of Ap spending is greater than one. Interest elasticity of Ap spending = (percentage change in Ap levels spending) / (c). For example, if percentage fall in Ap levels spending is 2% and the percentage increase in Ap levels spending is 0.25% then Interest elasticity of Ap spending is equal to 2% / 0.25% = 8.

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