Third Homework Assignment: (This is to be done in groups of 2 -3. You may not turn it in solo. Also, you must work with different partners from the last assignment.)
DEADLINE: Friday, February 29
Suppose the interest elasticity of autonomous expenditure is very low, say zero for the sake of argument. What does that mean and how does it manifest itself in terms of the IS Curve? Show graphically and explain the economics.
What would be a real world situation where the interest elasticity of autonomous expenditure would be low?
It’s well known that when the interest elasticity of autonomous expenditure is low, expansionary monetary policy is not very effective. Show graphically using the IS-LM model and explain the economics.
