Monetary and fiscal policy.

Central banks act systematically to changes in economic conditions and set interest rates Money demand fluctuates because income fluctuates If money demand is too high interest rates are increased to lower it and if too low interest rates are lowered to increase it again. This helps to keep the nominal money stock on a specified task and stabilises aggregate demand for output. Taylor Rule This implies that banks don't follow the monetary target but the …

…the LM schedule because if money supply increases money demand must move in line with it. Leads to higher output and interest rates. The IS-LM Model The IS LM model allows us to view both the goods and money market in 1 modelThe goods market is in equilibrium at all the points along the IS schedule and the money market, at all the points along the LM schedule. Only at point E are both in equilibrium.