The "Great Moderation" from 1985-2007 could have been due to either smaller demand shocks when

compared to the period prior to 1985 or a better re- sponse by monetary policymakers between 1985 and

2007 to the same demand shocks that occurred prior

to 1985. Evidence to determine which of these argu- ments is correct may be found by examining the

behavior of the interest rate during the "Great Moderation." If the "Great Moderation" was due to smaller demand shocks, then less variation in real GDP would have been accompanied by less variation in the interest rate as well. On the other hand, if the "Great Moderation" was due to better response by monetary policymakers to the same demand shocks

that occurred previously, then the decline in the vari- ation of real GDP would have been accompanied by

an increase in the variation of the interest rate. Evaluate these arguments using the IS-LM model.