Further, the estimates of equilibrium interest elasticities are approximately -.5 to -.6 for real M1 and -.4 to -.5 for real monetary base. From my notes: 'The elasticity of Money Demand reduces the impact on the interest rate of the increase in government spending...' My question is: if the Money Supply is inelastic, the elasticity of Md wouldn't matter, because the Md would just shift up/down by the same amount regardless of its slope, and it is the shift that determines the change in interest rate, which doesn't fit with my notes. Using data from 1900 through 1994, Lucas (2000) reports an interest elasticity … We can determine the interest elasticity of the market price using the following: The numerator is the current price change in percentage, and the denominator is the interest … A small fall in the interest rate leads to a smaller increase in investment and income. variables in the money demand regression (1) can be used to examine whether the interest rate elasticity has changed over time. The hypothesis of a unitary equilibrium real income elasticity (a velocity function) cannot be rejected. On the con­trary, the LM curve is steep if the interest elasticity demand for money is low. The more interest elastic is the demand for money, the smaller is the fall in interest rate when the money supply is increased. Abstract We estimate the time profile of the interest rate semi-elasticity of the demand for money that is theoretically derived from a money-in-the-utility-function (MIUF) model. 3. This paper computes the short and long run interest rate elasticity for a panel of eight sub -Saharan Af rican Elasticity. 5. Elasticity is a statistical concept, but is widespread in economics, and we will now take a look at it in this context. The interest sensitivity of money demand, therefore, is given by g, the income sensitivity of money demand by f, and so forth. The LM curve shifts to the right when the stock of money supply is increased and it shifts to the left if the stock of money supply is reduced. Though the focus of the present note is on the potential behavior of interest elasticity in the 1980s, the money demand regression (1) also permits the time trend and income elasticities to vary over this period. interest elasticity of money demand. This semi-elasticity increases to infinity as interest rates fall to zero. A flatter LM curve means that the demand for money is more inter­est elastic. 4. 2 Lucas (1988) reports an interest rate semi-elasticity between 0.05 and 0.1, which for an interest rate of 4 percent corre-sponds to an interest elasticity between 0.2 and 0.4. Gurley and Shaw contended that, as new interest-bearing substitutes of money are made available, money holdings become more sensitive to changes in interest rates, thus raising the interest elasticity of money demand (Chowdhury, 1989). Second, as a … 1.0 and the interest elasticity is high. When Y increases real money demand increases – i.e. The income elasticity of money demand is 2/3 while the interest elasticity is -0.1 (minus 10%). the demand curve for money shifts up and to the right. The LM curve is flatter if the interest elasticity of demand for money is high. 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