From my notes:

'The elasticity of Money Demand reduces the impact on the interest rate of the increase in government spending...'

My question is: if the Money Supply is inelastic, the elasticity of Md wouldn't matter, because the Md would just shift up/down by the same amount regardless of its slope, and it is the shift that determines the change in interest rate, which doesn't fit with my notes.

Maybe another way to put it is: does the elasticity of Money Demand affects how much it changes in response to a change in government spending? If so, how?


1 Answer 1


a small rise in interest elasticity shifts the equilibrium position of IS-LM CURVES to the right


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