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If you follow a strategy where you set r for the month (not M a ), money demand shocks have no effect on output, because there is effectively no LM curve - the interest rate remains equal to the chosen value F no matter what. Suppose the actual economy is as described in 3). That is, you can forecast the position of the IS curve perfectly, but there are money demand shocks that you cannot forecast. Given the goals of the policy committee, which strategy is better: setting r for the month, or setting M S for the month?
This document contains various important questions and their appropriate answers in the subject field of Economics.
Economics is the study of the principles governing the allocation of scarce means among competing ends when the objective of the allocation is to maximize the attainment of the ends.
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