Firstly, my understanding of the interest elasticity of investment (IEI) is that it is the responsiveness of investment to changes in interest rates. Therefore, when using the IS-LM model , monetarists consider the IS curve more elastic … Lower Monetary Policy Effectiveness? 7 shows that with increase in the money supply, the LM curve shifts to LM 1 , but even with no change in the interest … Investment Savings and Liquidity Money Note: If you've come here because your macroeconomics exam is tomorrow, good luck. A less elastic IS means that monetary policy is less effective… It is worth remembering that when the Bank of England is making an interest rate decision, there will be lots of other events and policy decisions being made elsewhere in the economy, for example changes in fiscal policy … On the other hand, if the IS curve is horizontal, monetary policy is highly effective because investment expenditure is perfectly interest- elastic. Fig. The IS curve is a set of points, dervived in the Goods Market (see also Keynesian Cross) which are the result of a changing interest rate, holding government spending and net exports constant. A liquidity trap … Monetary policy changes can have a significant impact on every asset class. 2. Potential Mechanisms There are two possible reasons why monetary policy may be less effective at persistently low rates: (i) headwinds resulting from the economic context; and (ii) inherent nonlinearities linked to the level of interest … ... Money demand interest elasticity and monetary policy effectiveness… A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rather than holding a debt which yields so low a rate of interest.". maximum possible increase in income for a given increase in the money supply. Investment, Interest Rates, and the Effects of Stabilization Policies THE RESPONSE of investment expenditure to changes in interest rates is at the heart of any analysis of stabilization policy. As a result, I can think of one reason why the IEI may be … Monetary Policy Effectiveness and the Slope of the IS Schedule Parts a and b of Figure 7-6 show the effects of an … investors can position their portfolios to benefit from policy changes and boost returns by being aware of the … Monetarists view fiscal policy less effective than monetary policy because of the low interest elasticity of money demand. The more sensitive the response, the more potent is monetary policy and the weaker is fiscal ex-penditure policy. Fiscal policy becomes more effective … The Monetary Policy Transmission Mechanism. (Even when changes in the interest elasticity of investment don't result in an infeasible negative interest rate quilibrium, the changes in the slope of the IS curve have important implications for the effectiveness of monetary and fiscal policy. This paper provides a theoretical basis for discretionary monetary policies being less effective as money demand is more sensitive to interest rates and less effective in checking recession than inflation.