Show How The Model Can Be Amended To Reflect The Current Conduct Of Monetary Policy In Setting The Short-Term Interest Rate. This assignment will explain how fiscal and monetary policy interact to influence interest rate and aggregate demand. Also I am going to look at the IS-LM model which determines real GDP and the real interest rate. Currently it is the interest rate that is the instrument of monetary control chosen to achieve a 2% CPI inflation target two years ahead. We can modify the IS-LM model in a somewhat inadequate way to show how setting interest rates will work by effectively determining real GDP, and through the short-run Phillips curve.