02. Monetary Policy As discussed in Ch.14, since 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 nancial markets and media typically look to changes in the short-term interest rates rather than changes in money supply to gauge the central bank's intentions. The following figure illustrates a time-series plot of Treasury Bill discount rate and the unemployment rate for the United Kingdom since 1983. Unemployment and treasury bill rate United Kingdom 19832016 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 198301-01 1984-07-01 1986-01-01 1987-07-01 1989-01-01 1990-07-01 1992-01-01 1993-07-01 1995-01-01 1996-07-01 1998-01-01 1999-07-01 2001-01-01 2002-07-01 2004-01-01 2005-07-01 2007-01-01 2008-07-01 2010-01-01 2011-07-01 2013-01-01 2014-07-01 2016-01-01 treasury bill rate Unemployment rate (a) If changes in monetary policy are reected primarily by changes in the short-term interest rate, what relationship would you expect to see between these two variables? [1.5 mark] (b) Based on your answer in part (a), does this relationship hold up in the data? [1.5 mark]