The Fed is considering two alternative monetary policies: 1. Holding the money supply constant and letting the interest rate adjust, or 2. Adjusting the money supply to hold the interest rate constant.
In the LS-LM model, which policy will better stabilize output under the following conditions? Explain your answer.
a. All shocks to the economy arise from exogenous changes in the demand for goods and services.
b. All shocks to the economy arise from exogenous changes in the demand for money.