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

Question

Quizplus · Accepted Answer

When d is large, any change in interest rates will have a larger effect on investment demand, leading to a greater change in aggregate demand. When f is small, changes in the money supply will have a larger effect on the quantity of real money demanded, also leading to a greater change in aggregate demand. Therefore, monetary policy will be relatively potent in influencing aggregate demand when d is large and f is small.

If the Investment Demand Function Is I = C -