Interest Rate Sensitivity

Money Demand & Investment Demand

Interest Rate Sensitivity and Money Demand

If people's need (Demand) for money is more sensitive (elastic) to price level changes,, then when the price level increases the Demand for Money curve will shift rightward more,, therefore the Nominal interest rate will increase at a greater rate than if people's need (Demand) for money is less sensitive (inelastic) to price level changes.

 Interest Rate Sensitivity and Investment Demand

If people's investment demand is more sensitive (elastic) to interest rates,, then when the interest rates increase investment demand will decrease by a larger amount (think full crowding-out),, if people's investment demand is less sensitive (inelastic) to interest rates,, then when interest rates increase investment demand will decrease by a small amount (think partial crowding-out)