A study has estimated the effect of changes in interest rates and consumer confidence on the demand for money to be: ln M = 14.666 + .021 ln C − 0.036 ln r,where M denotes real money balances,C is an index of consumer confidence,and r is the interest rate paid on bank deposits.Based on this study we know that the interest elasticity is:
A) unitary.
B) zero.
C) very elastic.
D) very inelastic.

Question

Quizplus · Accepted Answer

The interest elasticity in this case is determined by the coefficient of ln(r), which is -0.036. Since this coefficient is negative, we know that there is an inverse relationship between changes in the interest rate and the demand for money. Additionally, the magnitude of this coefficient is less than 1, which implies that the demand for money is relatively inelastic with respect to changes in the interest rate. Therefore, the best choice is D, very inelastic.

A Study Has Estimated the Effect of Changes in Interest