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Enquiries on CB2 practice

Discussion in 'CB2' started by Robert, Jul 5, 2020.

  1. Robert

    Robert Very Active Member

    May I know why the first answer is inelastic and 2nd answer is elastic ? Third answer is greater and depreciates?
    Image.jpg Image.jpg
     
    Robert, Jul 5, 2020
    #1
  2. Anna Walklate

    Anna Walklate ActEd Tutor Staff Member

    Hi again,

    To really convince yourself of this, it's best to draw the diagrams. In Section 19.1 of the textbook, it gives a diagram of the monetary transmission mechanisms, and in the pages that follow, it gives diagrams showing how the interest rate and exchange rate mechanisms can be explained.

    So for example, for the part (i), try drawing the interest rate transmission mechanism diagram with different money demand (ie liquidity) curves. If you draw an inelastic (steep) L curve, then a change in the money supply will lead to a relatively large change in interest rates, which will then feed into later stages. Compare it to the situation if you draw an elastic (flat) money demand curve. The diagrams are all there in the textbook - it's just a case of having a play with them!

    Good luck!

    Anna
     
    Anna Walklate, Jul 6, 2020
    #2
    Richie Holway likes this.

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