Explain the importance of interest elasticity on investments for the Reserve bank during recessionary times

Interest rates are important components of any economic system. They determine the cost to borrow money for credit and money paid to investors for placing cash into savings accounts or other financial instruments. Certain financial instruments are said to be interest elastic in which their value fluctuates when interest rates change. The Central Bank is aware of this attribute and seeks to modify interest rates according to economic conditions.

One example is that they tend lower interest rates they charge to banks in recessionary times with the understanding the banks will lower their lending rates as well. This is where interest elasticity comes into play. The lowering of the cost to borrow money will be an enticement to customers and businesses to take more loans to make added purchases. Another example that deals directly with investments, is situations in which the interest rate is too low that it discourages investors from buying bonds or CD's. The interest elasticity in this situation makes stocks more attractive because they offer a higher return.