3. Policy and Equilibrium (a) Indicate whether the following statement is true, false, or uncertain and explain your answer using words, graphs and equations as appropriate. (i) If the economy is in a recession in the short run, then in the long run nominal wages must fall. (ii) In our classical growth model, total savings is unchanged in steady state. (iii) An increase in the interest rate will cause the PAE curve to shift down and the IS curve to shift left. (15 marks total)Page 6 (b) Consider a closed, classical economy. (i) In a simple classical model, briefly explain, using words, equations, and graphs the impact of contractionary monetary policy on equilibrium. (ii) In a simple classical model, briefly explain, using words, equations, and graphs the impact of contractionary fiscal policy on equilibrium. Now consider a standard, closed Keynesian Economy. (ii) Briefly explain, using words and equations, the impact of contractionary fiscal policy on equilibrium - in all markets and over both the short and long runs. Illustrate your answer for each market considered. (35 marks total)