Question 3 (25 points) – Chapters 9 & 10/11 The following question’s sub-parts are completely separate questions. a) Some economists claim that the government should always use monetary policy to stabilize (or target) the real interest rate in the short-run if they also wish to keep the resulting impact on (changes to) consumption to a minimum. Is this claim true, false or uncertain? Explain by using words and one IS/LM diagram. (5 points) b) The government should always use monetary policy to combat the effect of business cycle fluctuations coming from changes in autonomous government spending on goods & services if it wishes to keep movements in unemployment to a minimum. Is this claim true, false or uncertain? Explain by using words and a single IS/LM diagram. (10 points) c) The government should never use fiscal policy to combat business cycle fluctuations coming from changes in autonomous investment if it also wishes to keep longer term movements in the price level to a minimum. Is this claim true, false or uncertain? Explain by using words and a single AS/AD diagram. (10 points)

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