An interest elastic investment expenditure tends to fall in response to
Answers
Answer:
The responsiveness of investment to a change in interest rates.
If investment is interest elastic then a fall in interest rates will cause investment to rise by a large extent.
If investment is interest inelastic then a fall in interest rates will cause investment to rise by a small extent.
Factors Affecting the Interest Elasticity of Investment.
On the demand side a lot higher than interest rates, then the elasticity will be low. This is because if investors expect a high return on their investments then a small increase in the interest rate will not affect their demand for loans that much as the return on their investments (minus the cost of interest) will still be high. Conversely, when interest rates are close to the expected return, the elasticity will be high. Essentially, if the expected returns to investment are close to the rate of interest and interest rates rise further then there will be even smaller (or maybe no) profits from investments, so demand for investment funds will respond significantly.
On the supply side, consider the money supply. When money is scarce, the elasticity will be low. And, conversely, when money is abundant, the elasticity will be high. Hence, interest investment expenditure tends fall in response to.