National income of money demand (d) (i) Elasticity (t): What effect does a percentage change in national income have on the change of money demand? The formula is: t = (△ d/d)/(△ I/I) =-(DD/di) * I/D.
EconomISts have the same view on the shape of China's is curve, that is, they all think that China's IS curve is a relatively steep curve inclined to the lower right. From the qualitative analysis, in the two-sector economy, the slope of is curve (function deformation: r=(a+e)/d-( 1-β)/d*y) is determined by the reaction degree of investment to interest rate and the marginal propensity to consume β. Other things being equal, the higher the interest rate elasticity or marginal propensity to consume of investment, the flatter the IS curve. In China, interest rate is set and adjusted by policy makers according to the needs of market changes and economic development, so it can be regarded as a policy variable. The reaction degree of investment to interest rate depends on the reaction degree of economic subject to financing cost. Personal financing accounts for a relatively small proportion in China, so we mainly consider the reaction of enterprises to interest rates.
In socialist public ownership China, state-owned enterprises play an important role in the economy. Due to policy protection, state-owned enterprises are slow to respond to interest rate changes. Small and medium-sized enterprises lack policy protection, the environment is more market-oriented and more sensitive to interest rates. Raising interest rates will increase the financing burden of small and medium-sized enterprises, force them to reduce financing, and make small and medium-sized enterprises with weak competitiveness on the verge of bankruptcy. For marginal propensity to consume, due to historical and social factors such as long-standing consumption habits, imperfect social security system and imperfect financial market development in China, compared with western countries, China's residents have a higher marginal propensity to save, which makes China's marginal propensity to consume lower.
3. LM curve with China characteristics.
There is a great controversy about the shape of LM curve in China. Some scholars believe that the LM curve inclines to the lower right because the public's money demand curve with speculative motives is different from that of western countries, and speculative money demand changes in the same direction as interest rates. Some scholars believe that because of the imperfection of China market, the interest rate elasticity of market investment IS low, so the IS curve is a steep upward curve, but the LM curve is very unstable. However, most people introduce the view that China LM curve inclines to the right, but it is steep.
The slope of LM curve (algebraic expression: r= ky/h-m/h) depends on the reaction degree of money demand to interest rate changes and income elasticity, while the trading demand of money is negatively correlated with speculative demand, and the corresponding elasticity is also negatively correlated. The greater the interest rate elasticity of money demand, the higher the income elasticity of money demand and the flatter the LM curve. First of all, China is a developing country with a large gap between the rich and the poor and an imperfect financial market and related systems, so interest rates have little impact on speculative demand. Secondly, China's social security system needs to be improved, and residents tend to save for preventive motives, while preventive demand is basically inelastic to interest rates and does not change with interest rates. From this point of view, the interest rate elasticity of money demand in China is relatively small, which leads to a large slope and a steep LM curve in China. With the improvement of financial market and diversification of financial instruments, this curve will continue to be flat.