Can someone please explain why the aggregate demand curve flattens when investment expenditure is highly sensitive to interest rates? Do they mean investment expenditure is more sensitive to interest rates than the propensity to save? I think I’m way in left field here.
Because the aggregate demand curve is quantity (x-axis) vs. interest rate (y-axis), the more sensitive any expenditure is to interest rates, the flatter the curve. It’s nothing more than price elasticity of demand.
Makes sense. Thanks!
Aggregate demand curve shows income (Y) vs interest rate. If investment is more sensitive to interest rate, investment (I) increases more for a given decrease in interest rate. To keep (S-I) = (G-T) - (X-M) in balance, S has to increase more. This must be supported by a greater increase in income (Y).