3. As discussed in the text, as money demand is unstable, the central bank may prefer to target interest rates rather than the money supply itself. When the central bank follows an interest-rate-targeting policy, the financial markets and the media typically look to changes in short-term interest rates rather than changes in the money supply to gauge the central bank’s intentions.

Using monthly data since 1983 for the United Kingdom, graph the Treasury bill discount rate and the unemployment rate. If changes in monetary policy are reflected primarily by changes in the shortterm interest rate, what relationship would you expect to see between these two variables? Does this relationship hold up in the data?