Answer the following true, false, or uncertain with an explanation motivating your answer (you may use graphs and math to support your answer).

1. Suppose that the central bank follows an inflation-targeting rule. Then monetary policy makes income more stable against demand shocks while it makes income more unstable against supply shocks. [8 marks]
2. Under capital budgeting, the federal government selling a highway to the province of Nova Scotia and using the proceeds to retire federal debt would affect the federal budget deficit. [8 marks]
3. If neither investment nor consumption depends on the interest rate, then the IS curve is vertical and monetary policy has no effect on output. [8 marks]