3. Short Answer Question (10 points) Use what you have learned about the impossi ble trinity argument to explain why the central bank cannot increase the interest rates and keep it at that level. 4. Short Answer Question (30 points) Recall the graphs we did in class for the law bor income tax and capital income tax, with the production possibility frontier of consumption~leisure and consumption today~tomorrow. In class, we did it for the case where you have labor income tax or capital income tax. (a) (15 points) Now, draw the same graph but under the new circumstance for labor income tax. You are taxed on labor income at the rate 7'}; but the government repays partial cash to you in terms of a lumpsum subsidy. Draw the tradeoff between consumption and leisure to reflect the subsidy as well as the tax. Does the subsidy help reduce the size of your deadweight loss (DWL) as measured by the tax wedge? Why or why not? (b) (15 points) Now, draw the same graph but under the new circumstance for capital income tax. You are taxed on capital income at the rate TK but the government repays partial cash to you in terms of a lumpsum subsidy as well. Draw the tradeoff between consumption today and tomorrow to reflect the subsidy as well as the tax. Does the subsidy help reduce the size of your deadweight loss (DWL) as measured by the tax wedge? Why or why not