If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.
A) large; small
B) small; small
C) small; large
D) large; large

Question

Quizplus · Accepted Answer

Fiscal policy is more effective when investment is less sensitive to interest rates (small d) and money demand is more sensitive to interest rates (large f), as this reduces crowding out effects.

If the Investment Demand Function Is I = C -