# Macroeconomics

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The “Great Moderation” since 1985 could be due either to
smaller demand stocks when compared to the period prior to 1985 or to
a better response by monetary policymakers since 1985 to the same
demand shocks that occurred prior to 1985. Evidence to determine
which of these arguments is correct may be found by examining the
behavior of the interest rate since 1985. If the Great Moderation is
due to smaller demand shocks, then less variation in real GDP has
been accompanied by less variation in the interest rate as well. On
the other hand, if the Great Moderation is due to better response by
monetary policymakers to the same demand shocks as previously, then
the decline in the variation of real GDP has been accompanied by an
increase in the variation of the interest rate. Evaluate these
arguments using the IS-LM model.

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