911 #
© 2014 Pearson Canada Inc.#- Show graphically and explain why targeting an interest rate is preferable when money
demand is unstable and the IS curve is stable.
Answer: See figure below.
Unstable money demand causes the LM curve to shift between LM' and LM". If the money
supply is targeted, output fluctuates between Y' and Y". With an interest rate target, output
remains stable at Y. Since the objective is to minimize output fluctuations, targeting the interest
rate is preferable.
Diff: 3 Type: SA Page Ref: 15
Skill: Recall
Objective List: WEB CHAPTER: The ISLM Model