The standard IS-LM model, as discussed in your textbook, makes no distinction between a central bank that implements monetary policy by targeting an interest rate at a given level or targeting a value for the money supply.Poole (1970) demonstrated, in the context of an IS-LM framework, that choosing between an interest rate or money supply target has implications for economic performance.

1. The Fed currently implements monetary policy by setting a target for an interest rate.Explain the circumstances under which:

a) setting a target for an interest rate would lead to worse economic performance than a policy strategy based on setting a target for the money supply, and,

b) setting a target for the money supply would lead to worse economic performance than a policy strategy based on a setting a target for an interest rate.

c) Illustrate your answers to parts (a) and (b) with separate figures.