Economists Are Fond of Calculating Measures of Elasticity $\Delta$ M $\Delta$ PY, Where M Is the Quantity of Money Held and the Income

question 57

Essay

Economists are fond of calculating measures of elasticity.If we calculate the income elasticity of money as the % $\Delta$ M/% $\Delta$ PY, where M is the quantity of money held and PY is nominal income, would you suspect the coefficient to be positive, negative or zero? Will the absolute value be greater or less than 1? Be sure to explain your choices.

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Definitions:

Working Capital

The difference between a company's current assets and current liabilities, indicating the liquidity and operational efficiency of the business.

Lender's Risk

The risk faced by a lender that the borrower may not repay a loan either in part or in full.

Asset Substitution

A financial strategy where a firm replaces less risky assets with more risky investments, potentially increasing shareholders' wealth but also the risk to lenders.

Debt Covenant

Agreements between a borrower and lender stating specific limitations or conditions about the borrower's actions.