Consumption: C= 1000 + 0.6Yd - 400r

Investment: I=250 - 500r

Government spending: G=500

Exports: X=1500

Imports: M=500+0.4Y

Income tax rate: t=0.2

Money demand: Md = 1000 - 250i

Money supply: Ms=985

Expected inflation rate: e=0.05

where Yd is disposable income, i is the nominal interest rate and r is the real interest rate.

Question: The final term in the equation describing investment, -500r, implies that a 1 percent (0.01) increase in the real interest rate reduces investment spending by 500(0.01) = 5 units. Similarly, the final term in the equation describing consumption, -400r, implies that a 1 percent(0.01) increase in the real interest rate reduces consumption spending by 400(0.01) = 4 units.

Briefly explain how the effectiveness of a monetary policy depends on the responsiveness of planned investment towards changes in real interest rate as well as on the responsiveness of consumption spending towards change in real interest rate.