For keynesian model,

Describe how, if at all, each of the following development affect the IS and/or the LM curve, and the equilibrium (r; Y ):

Investment demand becomes less sensitive to the interest rate.

I am diffucult to interpret the meaning of this statement that Investment demand becomes less sensitive to the interest rate. Please share your idea with me. Thank you.

  • $\begingroup$ I'd imagine this may refer to a so-called liquidity trap. So it is worthwhile checking your notes on the liquidity trap. Yet, I am open to being mistaken on the matter. $\endgroup$ – EB3112 Nov 18 '20 at 13:50
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    $\begingroup$ Hint: what decides the slope of the IS curve? $\endgroup$ – Dayne Nov 18 '20 at 15:16
  • $\begingroup$ I am sorry but this post does not satisfy our criteria for homework questions. Even if you have difficulty interpreting it at least make an attempt - even if the attempt is wrong nobody will think less of you for that, everyone can see that you are still learning. Here is a link to our homework question policy: economics.meta.stackexchange.com/questions/1465/…. If you edit the question to be in compliance with the policy your question will be reopened. $\endgroup$ – 1muflon1 Nov 18 '20 at 16:29
  • $\begingroup$ @Dayne The question says “investment demand is less sensitive to the interest rate” what is the meaning of it? That is the point that I don’t understand. Can you please explain this statement? $\endgroup$ – B11b Nov 18 '20 at 19:21
  • $\begingroup$ Sorry @1muflon1 I don’t want to learn complete answer. I am just asking for the meaning of the sentence that “ investment demand is less sensitive to the interest rate”. What is this? I want to learn it’s meaning. But I asked for it incomplete because of not enough language. So sorry for that. $\endgroup$ – B11b Nov 18 '20 at 19:25

Investment demand is part of the IS curve since the goods market is given by:

$$Y =C(Y-T) + I(Y,i) +G$$

where $I(Y,i)$ would be called investment demand (which will be some function of output and interest rate e.g. $I(Y,i)= d_1Y-d_2 i$. A sensitivity of investment demand to interest rate would usually be interpreted loosely as simply talking about the magnitude of effect that $i$ has on $I$ in this case $d_2$ (or $\partial I/\partial i$) - for example Blanchard et. al. Macroeconomics: a European Perspective pp 93 uses the phrase in reference to $d_2$. However, I think I also recalled the word to be used more narrowly in some work referring to more precisely elasticity of investment demand with respect to $i$ (i.e. $\frac{\partial I}{\partial i }\left(\frac{i}{I}\right)$), but I cant find a reference to the second example at a spot.

In any case the point is that the meaning of sensitivity of investment demand is to figure out what effect change in interest rate ($i$) has on the investment. For example, in an extreme case where $d_2$ would be zero investment demand would be completely insensitive to changes in interest rate.

  • $\begingroup$ Wow very explanatory answer! Many thanks. That is, this makes IS curve steeper. $\endgroup$ – B11b Nov 18 '20 at 22:47
  • $\begingroup$ FYI $\endgroup$ – Herr K. Nov 19 '20 at 1:07
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    $\begingroup$ @HerrK. Thanks for bringing that to my attention I will investigate this matter and if there is any rule-violation take an action $\endgroup$ – 1muflon1 Nov 19 '20 at 1:32
  • $\begingroup$ I forgot my email address and it’s passcode, Thus I have two accounts. But I cannot use it about for 1 year. I have only account that I use is this. $\endgroup$ – B11b Nov 19 '20 at 8:23
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    $\begingroup$ @B11b its ok I looked into it and the other accounts do not show any activity now so it does not seem to break rules $\endgroup$ – 1muflon1 Nov 19 '20 at 10:11

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