Sorry, but I agree with the book. The relation b=a^2 means that b is redundant as a generator, ie, given anything generated by a and b, use this relation to write it in terms of a alone, so that it is generated by a alone. Thus we have:
[tex]<a,b|a^4=1, b=a^2> \cong <a|a^4=1> \cong \mathbb{Z}_4[/tex]
You can prove this (or, without much more effort, the obvious generalization to more generators) by resorting to the definition of:
[tex]<a_1,...,a_n | r_1,...,r_m>[/tex]
as the quotient of the free group F generated by [itex]a_1,...,a_n[/itex] by the normal subgroup generated by [itex]\{r_1,...,r_m\}[/itex] (specifically, we write the relations in the form [itex]r_i=1[/itex], where [itex]r_i[/itex] is a word formed out of the [itex]a_i[/itex], ie, an element of F).